The Truth About Covered Calls
Most people who are invested in the stock market do not know that they can generate cash flow from their positions. The idea was first introduced to me back in'98 by a fellow trader. The strategy is called covered call writing. Covered call writing is considered so safe that even brokerage firms that manage IRA accounts allow you to write covered calls.
Covered call writing is usually easier than most people make it out to be. It works like this. I'll give you $1,000 now, if you let me buy your stock five months from now at a set price. If I want to walk away from the deal, you get to keep my money.
Now I will go into more detail. Do not worry, just keep re-reading this until you get it. I buy 1,000 shares of FGH at $10 and the stock goes to $11 several weeks later. I can make money right now without selling my stock by selling the option to someone to buy the stock from me six months from now at $12.50. For that option, the buyer has agreed to give me $0.50 per share or $500 right now.
The cool thing is that I get the $500 immediately deposited into my brokerage account. The option position now shows up on my brokerage statement. I must not sell the stock prior to six months unless I buy back the option at the current market price. I usually hold my stocks until expiration because of how much the option price fluctuates from day to day.
Six months from now, one of two things can happen. One, the stock rises above $12.50 and the person "calls" me out of my position which is great because remember, I bought the stock for $10. The second possibility is that the stock falls below $12.50 which makes the option worthless. Why does it expire worthless? Think about it. Why would the option holder "call" the stock away from me at $12.50 when she can just buy the stock for $11.45 on the open market?
I then start the process all over again and write the calls again.
Are you beginning to see how cool this strategy is? Here is what I just accomplished. First of all, I lowered my cost basis by 5% or $500. Secondly, I drew a line in the sand and said this is what I'm willing to sell the shares for, $12.50. Third, I generated instant income that I could use for Christmas or just reinvest.
I can not tell you how happy this strategy has made me since the crash of 2000-2001. The strategy has helped me keep my head above water in this depressing market.
There are a variety of software programs available that will let you spot the best stocks to buy, then write covered calls against. Of course you do not need any software. The software just saves you some research time.
As a reminder, make sure you "know what you own" and consult with a tax professional or adviser before investing your hard earned money! - 23229
Covered call writing is usually easier than most people make it out to be. It works like this. I'll give you $1,000 now, if you let me buy your stock five months from now at a set price. If I want to walk away from the deal, you get to keep my money.
Now I will go into more detail. Do not worry, just keep re-reading this until you get it. I buy 1,000 shares of FGH at $10 and the stock goes to $11 several weeks later. I can make money right now without selling my stock by selling the option to someone to buy the stock from me six months from now at $12.50. For that option, the buyer has agreed to give me $0.50 per share or $500 right now.
The cool thing is that I get the $500 immediately deposited into my brokerage account. The option position now shows up on my brokerage statement. I must not sell the stock prior to six months unless I buy back the option at the current market price. I usually hold my stocks until expiration because of how much the option price fluctuates from day to day.
Six months from now, one of two things can happen. One, the stock rises above $12.50 and the person "calls" me out of my position which is great because remember, I bought the stock for $10. The second possibility is that the stock falls below $12.50 which makes the option worthless. Why does it expire worthless? Think about it. Why would the option holder "call" the stock away from me at $12.50 when she can just buy the stock for $11.45 on the open market?
I then start the process all over again and write the calls again.
Are you beginning to see how cool this strategy is? Here is what I just accomplished. First of all, I lowered my cost basis by 5% or $500. Secondly, I drew a line in the sand and said this is what I'm willing to sell the shares for, $12.50. Third, I generated instant income that I could use for Christmas or just reinvest.
I can not tell you how happy this strategy has made me since the crash of 2000-2001. The strategy has helped me keep my head above water in this depressing market.
There are a variety of software programs available that will let you spot the best stocks to buy, then write covered calls against. Of course you do not need any software. The software just saves you some research time.
As a reminder, make sure you "know what you own" and consult with a tax professional or adviser before investing your hard earned money! - 23229
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posted by X - Men @ 3:51 AM
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