Options have a strange way of terrifying many newer investors. For some reason, they are always considered to be among the most risky ways to invest in the stock market. While it is certainly true that some forms of trading options actually increase your overall risk, the buy write strategy does not.
The covered call technique is an investment strategy that has been used by the investing elite for many decades. Not only has it been shown to help augment a portfolio’s return when used properly it actually reduced the overall risk that is inherently part of investing in the stock market. The buy write strategy is so conservative that it is even allowed to be utilized within an individual’s tax deferred retirement account.
In order to sell a call option there are a few things that you will need. The first thing you need is 100 shares of the underlying stock for every call you plan on selling. Additionally, you need to obtain your stock broker’s permission to trade options. Most online brokers, however, accept options techniques by default, particularly when you are writing covered calls, so this is not a big deal. Finally, you will need online broker that is capable of handling your buy and sell transactions.
The key aspect to this technique is that you actually own the necessary numbers of shares to be covered should the option you sell actually be executed. When you sell a call you are actually selling someone the right to buy your stock at a certain price if the option is executed before a certain date. If you did not actually own the stock you would have to go out into the open market and buy the stock at the current market place and then immediately sell it to the person to whom you sold the option at the agreed upon price. This would open you to an unlimited amount of liability. Selling naked calls is never a good idea.
Furthermore, the premium income that you receive for selling an option to buy your stock serves to offset slight declines in the market price of the underlying stock that you own. As long as the market remains relatively flat, which is what the US stock market is predicted to do for the next 2o years, selling covered calls is a great way to increase your portfolio’s overall return and protect you against minor decreases in your stock’s value.
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