Writing Covered Calls
Are you searching for a way to create additional income from your existing stock portfolio? With current interest rates bordering at all time lows many investors are left wondering what steps they should be taking now to ensure that they will have sufficient money at retirement to cover their needs.
If you have ever listened to any mainstream media investing shows you may have heard about a few options investing techniques that can help you leverage your money more effectively. Typically some options expert will show you charts where their company can help you double, or even triple, your investment in a matter of weeks (for a fee of course). While it is certainly true that many of the more speculative options techniques many indeed produce amazing results from time to time, more often than not the investor is left with nothing to show for their efforts. If you are seriously considering using options as a part of your overall investing philosophy, selling covered calls is definitely the place to start.
When you write a covered call (which is simply another name for selling a call option) all you are really doing is selling the right to buy 100 shares of stock you already own to another investor at a predetermined price if the call is exercised before a predetermined date. In return for selling the rights to a portion of your stock you will receive a predetermined premium which is deposited into your account immediately. You are free to do what ever you want with this income and it is yours to keep regardless of what happens to the price of the underlying stock.
The premiums you receive are beneficial to the seller for two basic reasons. The first is that your overall cost basis in the stock is reduced. Since your overall basis is lower you will have a small amount of downside protection should the stock price decrease. Furthermore, as approximately 75% of all options ultimately expire worthless (when held to maturity) you can continue to sell calls against your stock positions each and every month that you own the stock. Essentially, you are renting your stock to speculators and making money even in a slightly declining market.
Like all investing strategies and techniques, writing covered calls involves risk. Before you begin investing with real money you should always consult a qualified professional for advice. Additionally, many financial planners will also recommend that you practice selling covered calls on paper for three to six months before using your own hard earned money.
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