Disclaimer: This is not financial advice. I’m just explaining an additional way that people can generate extra monthly income. If you were to become interested in options, I would encourage you to only execute trades like this under the oversight of a experienced conservative trader.
One of the most conservative options trades is commonly referred to as the “covered call.”
You’re committing to sell 100 shares of your stock for an agreed upon price during a certain length of time and you’re paid a premium for that agreement.
The mechanics are fairly easy to understand using an example:
- You own 100 shares of a stock, let’s call it XYZ
- You bought XYZ for $100/share
- You sell a $110 call option which expires a month from now for $250 in premium
- If XYZ is trading at or above $110 in a month, you’ve earned the $250 in premium plus you earned $10 per share when you sold them for $110/share. $250 + ($10/share * 100 shares) = $1,250 you made that month
- If XYZ is trading below $110 in a month, you made the $250 in premium and you keep your shares to do a similar trade the following month
- The risk with this trade is that you lose any upside above the $110 price you agreed on for the premium you were paid. But, if your shares are called away, you made money from both the stock appreciation and the premium.
You can repeat this monthly for consistent income and if your shares are called away, you can buy additional shares or you can do what I’ll discuss in next week’s newsletter.
