Improve Returns By Writing Covered Calls
For most individual investors, the idea of trading options is about as appealing as driving to Las Vegas and putting our entire life savings on the roulette wheel. We all know options trading is risky, but what most investors do not know is that there is a type of options trading that is safer than most investments in the stock market.
Institutional and savvy investors improve their returns by writing covered call options against the stock in their portfolios. Covered calls are “call” options which are written against stock you own, in contracts of 100, meaning, one contract can be written against every 100 shares of stock. The reasons people write contracts against their stock are twofold. First, it increases the return of holding a stock for the long term. Second, it reduces risk by bringing in more return regardless of whether the stock price remains flat.
Stock contracts are not permanent, they expire at a specific time. For example, if an option contract is written for January, it will expire on the third Friday in January. That means that people buy options hoping they will dramatically increase in value, but if they don’t and the expiration date passes, they lose whatever money they put into the contract.
Not so for the owner of the stock. If you own enough stock to write calls against, the premium paid for the contract is yours regardless of what happens to the option. Let’s say, for example, that you sell options for $.25 each against 1,000 shares, which means that someone will pay you $250 for the right to buy your stock from you at a specific price, known as the “strike price”.
The buyers of such an option are hoping that your stock will rise in value enough before the expiration date so they can sell their option contract to someone else for a significant increase, but also, if the stock does go up in value, you will have to sell it to them at the agreed price. That is one of the risks of writing calls, in that it can limit your upside potential, but the returns over the months can greatly enhance your overall portfolio.
Related posts:
- A Quick Explanation Of Stock Options
- Why Investors May Use Stock Option Trading
- The Basics of the Put Option
- Reading The Details Of Your Fixed Annuity Contract
Covered calls are indeed a great way to increase the income you make on stocks you already own. There are a number of different ways to write covered calls. Selling cash-secured puts is an allied strategy that works well also. Please visit http://www.safe-options-trading-income.com for additional information.