How to Write a Covered Call
Covered call writing is a simple way of making the stocks that you own generate an income. To do this, you simply purchase at least 100 shares of a stock and then sell an option put on that stock. This gives you an income and also gives you a bit of insurance in the event that your stock declines. This is a very conservative way to earn money in the stock market.
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Things You'll Need
- An account with Investors.com
- An brokerage account
- Access to options quotes like on MarketWatch.com
- A computer
- Internet access
Instructions
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How to Write a Covered Call
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Buy a stock with good fundamentals. As of 2009 on Investors.com, there is a $20/month subscription fee, but it's one of the easiest ways to assess a stock's strength or weakness. The first thing to do is enter a stock ticker and do a "Checkup" on the stock. You want to look for a composite score of 85 or above. You want to see that the stock market is in an uptrend, denoted by a green light. Under institutional accumulation and distribution, you want a grade of B+ or better. Don't invest into any stocks that have a red or yellow by them. You want to see that the industry that the company is strong denoted by a green light. While doing this will not guarantee that your stock will make money, it will stack the odds enormously in your favor. You will have to purchase at least 100 shares of a stock to write a call option against it.
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Sell a call option. This is also known as "writing an option." There are two types of options: a put and a call. A call makes money when the stock goes up. A put makes money when the stock falls. You can sell a call and take in money from it, which does two things: It gives you income on a stock if it's not moving and also acts as a cushion in the event that a stock goes down in price. For example, you purchase 100 shares of Microsoft for $20.00. You pay $2,000 for 100 of these and you then sell an options contract with a strike price of $30.00 for $200, bringing your net cost to $1,800. So let's say that the stock moves from $20 to $22 by the time the option expires. You will have made the $200 from the stock plus the $200 from selling the option for a total of $400. If the stock fell from $20 to $18, you will break even because of the $200 you collected from the sale of the call option. If the stock goes from $20 to $35, you will make $1000 from the stock and $200 from the sale of the put. But at $30, your stock will be "Called" away from you and sold to the person who purchased the call. So you will only make money on the stock up to $30, which is the strike price of the option. Anything above that goes to the purchaser of the call option.
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Sell another options contract. The beauty of this is since options contracts expire, you can do this every month and create an income stream from the stocks you own, whether they are moving up, down, or going nowhere.
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Tips & Warnings
Make sure to use good risk management and only to use money that you can afford to use.
