One way to increase your return on investment is by selling covered calls. Covered calls are options written on stocks already
in your portfolio. It is a safe, virtually risk-free way to boost your ROI by 10 to 50 percent!
By writing a call you,
the option call seller, are guaranteeing the option call buyer the right to purchase from you 100 shares of XYZ stock at an agreed
upon price if acted upon (exercized) before a set date. If not exercized the call will expire worthless. For this right
the buyer pays you a fee (premium).
Example: You own 100 shares of XYZ. Your stock is slowly increasing in value
and you want to increase your return. You sell 1 call for $ .75 with an option expiration date 1 month hence. Current
market price of XYZ is at $21. The strike price of the option is set at $22. When your call is bought $75 is deposited
to your brokerage account ( $ .75 X 100 shares). If at the end of 1 month the market price of XYZ is less than $23 the option
will probably not be exercized ( $21 price + $1 set price + $ .75 premium + commissions = $23 ) If not exercized feel free to
repeat the process richer by $75.
$75 ... ? That seems like a lot of work for just $75. True...but say you owned
1000 shares of XYZ and not just 100 and 10 calls were written and not just 1.
Your MONTHLY income then would have been $750...and you can do this over and over.
But let's say the market price of XYZ reached
$24 and the option was exercized. In this case (and lets assume you owned 1000 shares of XYZ) $22,750 would have been deposited
to your brokerage account (less commissions). This is where the risk of option
writing comes in. When you wrote the calls
on XYZ you limited your upside gain to the strike price of the option plus the premium for writing the calls. On the other hand,
your downside risk on XYZ is mitigated by the premium received. Most options (4 of 5) expire worthless.
If several stocks
are owned, a steady income can be generated from writing covered calls.
A varient of writing covered calls can allow you to purchase
stocks below market price. If covered calls are written on stocks at the moment of purchase the purchase of the stocks is discounted
by the premium received.
