Sunday, December 21st, 2014

Writing Stock Options for Income

April 14, 2014 by Jim Walker  
Filed under Call Options, Options Trading Tips

 

Selling calls or puts on stocks that you own is called covered options trading. Writing stock options for income is a time honored way to gain from stocks that you own. The way writing stock options for income works is that you own a few hundred shares of a very stable stock. You know that it very unlikely that the price of the stock will change very much. So, you sell call options on the stock. This is referred to as writing options. You do not expect to have to sell the stock as it is a very stable stock. However, there are options available on your stock. These options contracts pay a reasonable amount for the right to buy 100 shares of your stock at any time within the contract period. Because you will probably not have to sell the stock in question you will simply gain a little income from writing stock options for income. Here is a little about how options work and someone who own a stable stock can make money in this manner.

Call Contracts

In selling American style stock options the buyer has the right to exercise the options contract at any time up until contract expiration. This differs from European style options in which the buyer can only exercise the contract at expiration. The buyer will only do this if the price of the stock raises enough for him to make a profit. Thus when you are writing stock options for income you will want to analyze your stocks and only sell call options on stocks that you believe will not go up in price during the contract period. The beauty of limiting yourself to calls when writing stock options for income is that you will never lose money. If the stock price goes up you will have to sell the stock and could even miss out on a big price increase. But you will be compensated to a degree by the premium that you get for selling the call contract.

Stocks that Trade in Channels

There are many stocks that trade in channels. They are strongly influenced by interest rates or other factors in the economy. Thus they go up and down according to external events. If you have owned one of these stocks for years you will typically have a clear idea of how high the stock will go and how far it will fall in the coming months. It is obvious that if you want to keep the stock and still make money that writing stock options for income with calls will only work when you believe that the stock is nearing the top of its trading channel. Traders who do not know the stock as well as you will often buy calls on the stock because they believe that the stock will continue to rise. Because your analysis is more informed you can make money writing stock options for income by selling calls at the top of the channel. Add this income to the dividends that you receive and you can earn a tidy recurring income by stock option trading with stocks that you own.

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