Generate Monthly Income Using Covered Calls

While trading stock options is not a very conservative investment strategy, one of the more conservative methods of do it is known as covered call writing. It is so named because the underlying stock is fully owned by the person selling a stock option. This provides some protection against loss for the stock owner.

It differs from naked call writing in that the seller does not own the stock on which he is selling options when trading "naked". Naked trading does not limit the risk involved in any way.

Ideal stocks for this type of trading are those on which the seller does not expect to see any major movement in either direction during the term of the option. This is because the ideal situation would be that the stock is still trading below the strike price (the price at which the stock will sell if said option is exercised) when the period expires. In this case, the person holding the open option will likely allow it to expire without exercising option rights.

In this scenario, the seller collects a premium for the options and holds the associated stock during the term of the option. If there is no exercise of an option before the term expires, the seller keeps both premium and stock, pocketing the premium as a profit. If the price of a stock goes above the strike price during the term of the option, the buyer has the right to call for this stock at the agreed-on price, in which case he profits as well.

Stocks that go down in value can result in the seller having to buy back the options he sold. This loss is limited to returning the premiums collected on the options. The person still owns his stocks, albeit at a lower value than when the covered call was written.

This is not a foolproof method of investing. There are no guarantees at all associated with it. However, if done properly, it becomes possible to make an income of up to five percent each month in premiums as long as the stocks do not move in value much during the term of the option.

For more information about covered call investing, go to Born To Sell. This site has a free newsletter, blog and tutorial on covered call trading. Generate Monthly Income Using Covered Calls