Things You'll Need:
- computer
- internet
- neutral expectations for your stock positions over the next 30 days
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Step 1
Analysis your stock positions - Do you have any positions where the value has held constant over the past 3 to 4 months? Do you want to make a few extra dollars from these positions while they get their acts together? If so, you may want to learn how to sell covered calls to generate monthly income.
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Step 2
Sell a call against the stock you already own - For every 100 shares of a stock that you own, you can sell 1 call against them. For example, let's say that we own 200 shares of XYZ as of August 1, 2008. This stock has been trading in a range from $30 to $35 for around 3 months (and is currently at $34). We would like to make some additional income from these shares while the market figures out what to value the stock at. We go online to our brokerage account and sell 2 SEPT 35 calls for $1.00. This would put $200 (200 shares times $1) into our account immediately (or 2.9% of the value of our stock).
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Step 3
Wait until the end of the expiration period and evaluate your results - Options expire on the 3rd Friday of every month. In our example, we sold 2 SEPT calls which would expire on September 19th.
If the value of the underlying stock stays below $35, we will keep the stock and the premium income we received for selling the call. This means we have earned an additional 2.9% for one month. Do this every month and you can increase your portfolio's return dramatically.
If the value of the underlying stock rises above $35, we will have to sell the stock to the person who bought our call at $35 (no matter what the value of the stock is). In this circumstance, we would keep the $1 per share of premium income, plus we will earn $1 from the increase in share price (from $34 to $35). $2 of earned income represents a 5.9% one month return. No too bad for 30 days! -
Step 4
Reinvest your proceeds or sell another call - If you did not get called out in Step #3, you are now free to sell another call on these shares. If the value remained constant, I would probably sell an OCT $35 call and receive another $1 to do so.
If you were called out in Step #3, you now have your investment returned to you, plus the additional income you earned, and are free to reinvest your proceeds. You can repurchase the same stock and sell more calls against them, or you can look elsewhere.
