How to create income with Covered Calls
Making money with covered calls is an easy way to earn some greens with the stock you already own. With the economy being the way it is there are still different ways to make money in the stock market. Selling covered calls against shares of the company that you own is a way to make money. Not investing with covered calls is like throwing free money away. When you sell covered calls you are giving someone the right to possibly take your stock away from you sometime in the future. Depending on the homework and due diligence that you have done this may not happen all too often.
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Instructions
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Step One: Let's go through an example of how this exactly works. One of the first steps to do this is to have at least 100 shares of a company already in hand. Each option contract is the equivalent of 100 shares of stock. So if you have 120 shares of Wal-Mart (WMT) then you can only write one contract. If you were to have 1,012 shares then you could sell 10 covered calls on WMT, for the 1,000 shares that you are long or have with Wal-Mart.
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Step Two: You have 1,000 shares of Wal-Mart currently valued at $50.00. You then sold 10 contracts of the WMT December $60 call option. This number, the $60 call option, is looked up in an option chain through your stock broker. There are different options that you can choose from in the option chain. In the example, you sell the options at the bid price of $0.22 and then receive around $220. The $220 comes from 10 contracts, or 1,000 shares, times $0.22 per share. The premium received, in this example the $220, is directly deposited into your brokerage account.
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Step Three: That is the extent as to how covered calls work. It is an excellent way to receive income from your shares that you already own. The only downfall, if it should be called that, is that your shares could be called away or assigned at the higher price.
A great allusion as to how selling covered calls work is to compare it to being a landlord. You are basically renting your shares for a period of time and receiving a premium or money up front for loaning them out.
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Tips & Warnings
If you really want to keep your shares then maybe this isn't for you. The possibility to be assigned is always there.
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