You’ve heard about it from your co-workers and also on all of the finance shows on television. Your retirement could use a boost and some extra pocket money wouldn’t hurt. But can you really make money writing covered calls?
More importantly, can you make consistent money with this options trading strategy?
The answer: Yes you can, if you know what you are doing.
Own 100 shares.
If you own at least 100 shares of stock you can generate a monthly income without ever selling those shares. Many stocks are optionable or have options than can be bought and sold. Options are traded in the same way that stocks are.
Many people purchase options in hopes of turning a profit without having to actually own the stock itself. Who are they purchasing those call options from?
They are purchased from the owners of the stock.
This is how you make your money. If the stock you own has options you can sell one options contract for every 100 shares of stock you own. The money you receive from selling those options is yours to keep no matter what.
Whether or not you end up selling your stock you still get to keep the premium received when you sold the call options.
It’s basically a non-refundable deposit someone pays you for the right to buy your stock. The key to the covered calls strategy is selling options that have a low likelihood of being acted on.
What happens if you have to sell the stock?
If selected correctly you can even make money if you do have to sell your stock. And if you do end up selling your stock you can either purchase it back again or choose another stock and repeat the process all over again.
Should you choose to sell covered calls on a stock every month you could potentially make more money than if you were to just wait for your stock to appreciate.
Monthly returns from selling your calls can range anywhere from one percent to ten percent, maybe more! Although options that have higher returns can have very volatile stocks associated with them, which can make it very difficult to generate income from them on a regular basis.
You want to avoid making costly mistakes that may be difficult or impossible to recover from.
When you pick the stock that you wish to sell options on, a reasonable return to look for is around 5 percent per month. Less than that isn’t worth the effort and higher yields may prove more difficult to navigate.
You should always look at the option price as well as the stock price when executing this investing strategy.
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