I really believe that all investors and business people should look for ways to generate an extra, independent, separate source of income. The problem is that most people are so busy already that they need a way to build this income in a non-busy, passive way. Now comes Writing Covered Calls. It is way of using two aspects of the stock market and combining them so you get assets producing income.
Most investments do not generate income from an outside source. Can we find a way—like Rental Real Estate—to use the stock market to spin-off real spendable cash? Can we use this method to make extra money for our retirement—whether it’s at 42, 62 or 82?
The answers to this quest is wrapped up in the following posting I did a few days ago. If any of this seems difficult, please go to wadecook.org and receive for FREE my special report, entitled Job Free Income.
Here’s the posting: There is an example of Writing A Covered Call in a few paragraphs.
Hi there. We will start with a short conversation on the paramount question when it comes to Writing Covered Calls. The question which controls not only decisions to be made, but the thinking process that leads up to making better decisions.
I just used the word better in the last sentence, and all in all, that may be an understatement. Better usually means, good, better, best, but when it comes to the stock market, much of this centers on what is best for you. To go there we need to bring up your experience, your risk aversion and rewards, and simple, mundane things like the time you have to watch your trades.
Here is the over-arching question is this: “Do I want to sell the stock?” Yep, simple, yet powerful. Let me give another Wade Cook rule of thumb: I do not buy options to actually buy the stock; and I do not sell options to actually sell the stock. Take a moment and internalize that before we move on.
I Write Covered Calls to take in the income. Selling the stock is usually an afterthought. This is one reason I keep say, “I like slightly ‘out-of-the-money’ options. For example: If I have a stock at $5.80, the $5 calls will have a rather large option, the $5.50s, if they exist will be tempting, and the $6 calls will be less—NOW.
Let’s do the $6 calls. We’re about to use Assets to Produce Income. $5.80 for a stock. Okay, let’s buy 1,000 shares. Now we sell the option, allowing someone to have the right to buy our stock at $6. The market is gong to give us cash, in on day, for someone to gain the right to buy our stock. These options are going for 50¢. We have 1,000 shares, so we take in $500. That’s now our money.
This is income we receive for taking on the obligation to sell our stock at a price we like. Remember we bought the stock for $5.80 and if we actually sell the stock we’ll make another 20¢ times our 1,000 shares, or $200. That would be $700 of income. We have all of our original money back, and $700 in profits. Tell me what you’re doing to take $5,800, or $2,900 (margin, you only have to put up half of the money) and make $700 for one month—and you can do this again next month and the month after.
I think you realize that if you sell the $5s, much of the in-the-money portion is embedded in the option premium. The option premium may be 90¢ or $1.20, but 80¢ is in the money. An option will always be worth the in-the-money portion. That amount will ebb and flow with the stock price.
Move up to the $6s and the options might be going for 50¢. It’s all out of the money. Yes, it’s less, but you may just get more movement in this option, and therefore be able to buy-back the option and get another sell off on the next rise.
The most trades in one month that I’ve done on one stock is five trades—on Netflix (NFLX) and Qualcom (QCOM). Those were amazing months. All of these were with slightly out-of-the-money options. Once or twice they were near the money. Sometimes we call this at-the-money, but they often move so quickly, it’s in or at or out of the money.
So, to summarize: If you don’t really want to get off a second trade, sell the option close to the money option. If you sell a lower strike price option, then watch the movement of the stock and see if other opportunities come your way.
Remember, when you buy an option you only make money when you sell it. When you sell an option—say as a Covered Call—there are many more things to consider:
- Keep the position open and get called out or not.
- Buy back the option and consider reselling it again on a rise in the stock price.
- Buy back the option and then sell the stock.
- Buy back the option and sell the option at a different strike price—down or up.
- Buy back the option and sell the next month out.
- Sell part of the stock position and write calls on the balance.
- Buy back the option and leave the stock alone—hoping for a rise in the stock price.
- Wait until the time gets close to the expiration date and step in with a buy-back and roll-out. You could also check and see if sell a short-term option is good.
- The underlying stock presents some benefits. It may grow in value. The buy-back allows you the chance to take back control. The company may pay a dividend. There may be a stock split.
- Use the option premium to buy more stock and sell more call options. See R.U.N.—Ramp Up Now—in the Paid to Trade.
That’s a lot to think about, but this thought-provoking process may just pay off handsomely. That’s our aim in sharing this information.
I want to share a few additional insights. Do you remember THE PRICE IS RIGHT? I saw it again the other day. I had no idea it was still on TV. They would say, “Behind Door #1—we have . . .”
There were three doors. Years ago I shared what you just read, but it was, “Behind door #4, then #7, etc. I went through the list given above. I just sat to type this, and they just rolled off my fingers—nimble phlanges that they are.
But right now, you are the only people in the country who get to experience this. These are real and will bring you more profits. Again, most people who work with options have one choice after they buy an option and that is to sell—at a profit or loss.
That’s the power of this discussion. When you sell an option to open a position, the above future choices open up to you. There are so many ways to make money—more specifically, nine ways to keep market forces to work for you. When you sell the call option you put time and implied volatility to work for you. You put money in your account, and then you wait it out—actively and/or aggressively—and see what the market gives you.
And this doesn’t bring up the potential profits on the underlying stock and all the future monthly premiums you’ll take in. This is so exciting. I hope you understand our passion—there are excess monthly profits waiting for you.
© 2016 Wade B. Cook. All Rights Reserved. Visit Wade at www.wadecook.org. Order the Special Money Report, Job Free Income. It’s FREE.