It is easy to become a bit overwhelmed by the language and information when you first begin learning about options trading, and covered call options in particular. But covered calls are not much different than other investment strategies. The key is to find good sources of information and to study as much as you can before investing. The covered call strategy can be a good money making source, but it is not a "get rich quick" scheme. If you are looking to become rich quickly, then you should look for some other strategy. On the other hand, if you are interested in a consistent way to earn monthly income, then covered calls are a good choice.
A few typical questions among new covered call investors:
What are covered calls?
A covered call is an investment in two parts. First, buy 100 or more shares of stock. Second, sell a call option against that stock. Options control 100 shares each, so you sell one call option for every 100 shares of stock you bought (if you bought 500 shares you could sell 5 call options, for example). The combination long stock + short call option is known as a "covered call".
Remind me what "long" and "short" mean in the context of stocks.
When you own a security, then you are considered to be "long" and when you are "short" a security, it simply means you are selling it without actually owning it. You will then have to purchase it at some time in the future.
Ok. But how do I make money?
When you sell a call option to a buyer he will pay you a "premium" that is yours to keep whether the option is exercised or not. This premium is yours, no matter what happens to the underlying stock. It is this premium that is the source of your monthly income.
When should I sell call options?
You can sell call options against your stock at any time. In fact, you could do it every month if you want to (and generate recurring monthly income). You would not want to do it if you expect the stock to shoot up in value in the very near term. By selling the option you are putting a cap on your upside for the stock (in exchange for the option premium you receive). The best case, for you the option seller, is to have your stock stay flat between the time you sell it and its expiration. That way you collect the option premium, break even on the stock, and can do it again the following month.
Investing in covered calls is not difficult. It is the most common options-based investment strategy (Schwab says 84% of their option enabled accounts will do covered calls). Having a good covered call screener at your side will save you time (much better than a manual spreadsheet). If you're not selling calls against stocks you already own then you're leaving money on the table each month.
A few typical questions among new covered call investors:
What are covered calls?
A covered call is an investment in two parts. First, buy 100 or more shares of stock. Second, sell a call option against that stock. Options control 100 shares each, so you sell one call option for every 100 shares of stock you bought (if you bought 500 shares you could sell 5 call options, for example). The combination long stock + short call option is known as a "covered call".
Remind me what "long" and "short" mean in the context of stocks.
When you own a security, then you are considered to be "long" and when you are "short" a security, it simply means you are selling it without actually owning it. You will then have to purchase it at some time in the future.
Ok. But how do I make money?
When you sell a call option to a buyer he will pay you a "premium" that is yours to keep whether the option is exercised or not. This premium is yours, no matter what happens to the underlying stock. It is this premium that is the source of your monthly income.
When should I sell call options?
You can sell call options against your stock at any time. In fact, you could do it every month if you want to (and generate recurring monthly income). You would not want to do it if you expect the stock to shoot up in value in the very near term. By selling the option you are putting a cap on your upside for the stock (in exchange for the option premium you receive). The best case, for you the option seller, is to have your stock stay flat between the time you sell it and its expiration. That way you collect the option premium, break even on the stock, and can do it again the following month.
Investing in covered calls is not difficult. It is the most common options-based investment strategy (Schwab says 84% of their option enabled accounts will do covered calls). Having a good covered call screener at your side will save you time (much better than a manual spreadsheet). If you're not selling calls against stocks you already own then you're leaving money on the table each month.
About the Author:
To learn more about covered call options, please visit http://www.borntosell.com. The pros make a ton of money selling options; you should be doing it, too.
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