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Options Investing Strategies – The Covered Call Option

By Jason Markum

Investing in stock options can be complicated for a lot of people, myself included! That’s why I wanted to write this article today and give you a few simple strategies that you can use to profit from selling and buying options.

If there’s one thing that professional investors have long ago created it is a large and impressive number of different investing strategies they use the options market. Many of these strategies are very very complicated and since they use a huge amount of capital they’re not recommended for many individual investors like you and I.

On the other hand however, many of the basic option strategies that they use CAN be used by us little guys to give us many different investment capabilities that we would not normally have. So let’s get right into it.

The main options strategy that I want to discuss is selling options on your stock portfolio. This is basically referred to as writing covered calls and it gives you the opportunity to generate income on your portfolio in a slightly different manner than the ordinary dividend income that you may be used to.

You may be used to buying call options but with this strategy you actually write them and sell them on your own portfolio. In return for selling a call option you will receive the premium that the other investor pays to buy that option.

It is good to use this strategy when you don’t expect your own portfolio of stocks to increase or decrease significantly during a specific period of time. But let’s take an example to make things a little clearer…

Imagine that you own 200 shares of a company stock and you paid $40 a share for them. You think that the price of the stock is going to remain mostly constant, that is it’s not going to move up or down significantly in the near future. So, you write a covered call at an exercise price of $45 and you sell that call to an investor for one dollar.

What is the risk involved? Good question… if the share price increases higher than $45 you will be forced to sell at $45. So let’s pretend that the share price goes up to $60 a share. You will be forced to sell your share at $45 instead of the $60 that you could sell them for on the open market. That means you’ll have missed out on $15 worth of price increase, minus the one dollar that you earned when you sold the covered call… meaning ultimately you lost 14 bucks.

But you didn’t actually lose that money, you just never get to have that money. You still earn six dollars because remember you bought the shares for $40 and you sold them for $45 and you made a dollar writing the covered call.

As you can see this may be a very good way to make money on your portfolio if you don’t expect the price of your shares to rise significantly in the future, and if they do rise in the future then you just don’t get to participate in that increase but you aren’t really out anything if you really think about it; which makes this a very interesting strategy for many investors.

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