| Investing in stock options can be complicated for a lot | | | | take an example to make things a little clearer... |
| of people, myself included! That's why I wanted to | | | | Imagine that you own 200 shares of a company stock |
| write this article today and give you a few simple | | | | and you paid $40 a share for them. You think that the |
| strategies that you can use to profit from selling and | | | | price of the stock is going to remain mostly constant, |
| buying options. | | | | that is it's not going to move up or down significantly in |
| If there's one thing that professional investors have | | | | the near future. So, you write a covered call at an |
| long ago created it is a large and impressive number | | | | exercise price of $45 and you sell that call to an |
| of different investing strategies they use the options | | | | investor for one dollar. |
| market. Many of these strategies are very very | | | | What is the risk involved? Good question... if the share |
| complicated and since they use a huge amount of | | | | price increases higher than $45 you will be forced to |
| capital they're not recommended for many individual | | | | sell at $45. So let's pretend that the share price goes |
| investors like you and I. | | | | up to $60 a share. You will be forced to sell your |
| On the other hand however, many of the basic option | | | | share at $45 instead of the $60 that you could sell |
| strategies that they use CAN be used by us little guys | | | | them for on the open market. That means you'll have |
| to give us many different investment capabilities that | | | | missed out on $15 worth of price increase, minus the |
| we would not normally have. So let's get right into it. | | | | one dollar that you earned when you sold the covered |
| The main options strategy that I want to discuss is | | | | call... meaning ultimately you lost 14 bucks. |
| selling options on your stock portfolio. This is basically | | | | But you didn't actually lose that money, you just never |
| referred to as writing covered calls and it gives you | | | | get to have that money. You still earn six dollars |
| the opportunity to generate income on your portfolio in | | | | because remember you bought the shares for $40 |
| a slightly different manner than the ordinary dividend | | | | and you sold them for $45 and you made a dollar |
| income that you may be used to. | | | | writing the covered call. |
| You may be used to buying call options but with this | | | | As you can see this may be a very good way to |
| strategy you actually write them and sell them on your | | | | make money on your portfolio if you don't expect the |
| own portfolio. In return for selling a call option you will | | | | price of your shares to rise significantly in the future, |
| receive the premium that the other investor pays to | | | | and if they do rise in the future then you just don't get |
| buy that option. | | | | to participate in that increase but you aren't really out |
| It is good to use this strategy when you don't expect | | | | anything if you really think about it; which makes this a |
| your own portfolio of stocks to increase or decrease | | | | very interesting strategy for many investors. |
| significantly during a specific period of time. But let's | | | | |