A very common misunderstanding is that all options investing is high risk.  Writing options against stocks, sometimes known as writing covered calls, is a conservative strategy for income.  In fact, when I was managing money for individual clients I used to employ this concept regularly.

I wish I could equip you with everything you need to know to utilize this strategy in today’s blog entry, but that is just not possible.  I will give you a brief explanation and then a link that you can use to learn more. 

First, the kind of option we would be employing is a call option.  A call option represents the right of the option owner to buy (or as the term was originally used “call away”) a stock at a given price.  The option price is also called the strike price.  Stay with me, this is not very hard to understand.  Let’s say that a stock you own is trading at $50 and an investor believes it will be going to $60.  The option investor might buy a call option with a strike price of $55 (the price at which they get to buy the stock).  If the stock hits $60, he has a $5 gain ($60 minus $55 strike price).  On a standard contract which represents 100 shares of stock, this is a $500 profit.  But who does he buy the option from?  He buys it from someone that owns the stock (perhaps you).  That is where selling options against your own stocks comes in.

In this example, you could be the person selling the option and you would receive the option premium from the option investor.  Once you receive the option premium, you can do whatever you like with the money.  It is your money to spend and you never have to pay it back.  If the option is exercised, you would also be paid $55 per share for your stock (which in our example is currently trading at $50).  If the option is not exercised, you just keep the option premium paid to you and you can sell another option and do so over and over again.  This is how options create income. 

Here is much more complete explanation from Investopedia.   

Cut Down Option Risk With Covered Calls 

One of my favorite option strategies was to buy a portfolio of good conservative stocks for a client and then sell 2 years options (Leaps) against all of the stocks in the portfolio.  This would create a windfall of money that could be used by the client as income for the next two years (or take a vacation) or they could use this money to buy more stocks and then sell even more options against those stocks.

I wish I could tell you that this was something that was easy to do on your own, but it is a bit complex.  Therefore, I would suggest that you find a good account manager that can help you.  I would recommend Robert Yetman.  His e mail is [email protected] if you would like to contact him.

Option writing is a fantastic strategy that is not used by very many investors, mostly because they just don’t know about it.

Agree or disagree, click on comments below.

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James L. Paris
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