Have you ever thought about using the stock market as a part-time business, producing actual take home pay? No? Okay then we would like to introduce you to just one such strategy for producing actual monthly checks.
Writing Covered Calls is a cash-flow work-horse strategy.
It is a classical way to get assets producing income.
First we need to explain options.
An option is a privilege, sold by one party to another, which gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date.
One option contract generally represents 100 shares of the underlying stock.
For example, let's say that XYZ stock is trading at $4.
75 a share.
You can buy the $5.
00 option that expires in two months for $.
50 per share, or $50.
00 for the contract.
($.
50/share X 100 shares) Now, let's say that in that two month period XYZ stock goes up to $6.
00/share.
You can do one of two things, you can do what is called "exercising" the option, in other words, you can buy the stock at the agreed upon $5.
00/share which would give you a $.
50/share profit, or you can simply sell the option which would have gone up in value to $1.
25 - $1.
50/share.
All of this involves an option which is known as a "call" option.
As stated above a "call" option gives someone the right to "buy" a stock at a pre-set price.
One more point about options, they all have a specific expiration date.
All options for a particular month expire effectively on the third Friday of that month.
Here's another example: A broker or option professional has a stock that is priced at $4.
90.
It should go up.
There is activity on the options.
Options give the purchaser the right to buy so many shares of the stock at a certain price by a certain date.
The next month out $5 calls are.
45 X.
50 cents, the bid and ask.
You would pay.
50 cents, say times 1,000 to lock down the right to buy 1,000 shares at the $5 price.
Think of what you would make on your $500 trade if the stock goes to $6.
You could make a profit of $500.
Cool deal.
But the problem is that the stock doesn't have to go up.
It could go down or stay about where it is.
It has to go up and go up quickly or you will lose all or part of your money.
It's too risky for the average investor.
So how is writing covered calls different? To write means to sell.
Covered means you own the stock.
Call is a call option.
Let's get back to the Option Market Maker.
He has sold to someone, the right to buy the stock at $5 for.
50 cents.
He has to deliver the stock if the option is exercised on.
However he looks around and finds other people who also own the stock.
There you are living in Miami.
He tells you he'll give you.
45 cents, or $450 if you will agree to sell your stock.
He lays off the obligation on you.
He will give you the $450 the next day, and you have to wait out the term, usually 3 or 4 weeks to the third Friday of next month.
You are interested.
$450 is not bad and you are already contemplating the extra $100, which is the difference between the $4,900 purchase price and the $5,000 sales price.
You ask him, "What if the stock stays to same, around $4.
90?" He says, "That's fine, you won't have to sell the stock.
" "But do I get to keep the $450," you ask.
Yes, and you further learn that if you sell the stock or not, you still get to keep the $450.
" "Wow," you say, "so what's the downside?" He tells you the only new risk is that you sold away all profit above $5.
If you think you have a high-flyer, than don't use this stock to write a covered call.
The $450 is yours.
You can take it out immediately, or leave it in your account.
You can pay bills with it, leave it alone, or use it to buy more stock.
The broker makes the $50, and does this hundreds or thousands of times a month.
Everyone benefits.
You took in $450, minus commissions and if you didn't get called out of the stock you can do this all over again.
If you did get called out and the stock still looks strong you can simply buy it back at the current price and continue to write covered calls on it.
Now the market maker doesn't actually call you, but you can see what he is willing to pay you by having your broker or your online brokerage firm look at the going rate for that particular option.
When you are selling the call you will be looking at the "bid" price.
If you are looking to buy an option you will be looking at the "ask" price.
If you had ten chunks of $2,500 you could take in $2,000 to $3,000 every month.
You can even do this two or three times a month, when you learn about another power-strategy, the buy-back.
Simply put, this is a CASH TO ASSET TO CASH FLOW STRATEGY.
It works, and it's fun and easy.