Professional investors have always known that stock options are a good source of recurring income. They are wasting assets and so the buyers (usually non-professional investors) lose money as time goes by and the options lose value. In the last 10 years or so, however, non-professional investors have been studying how to trade options in ever bigger numbers. Calls and puts are the instruments of choice, but we’re going to talk about call options in this article.

Call options inbue the right for the buyer (holder) of the option to purchase shares for a certain price on or before a certain date. If you are the buyer then you give money today so that you have the right to exercise your option and purchase the shares you want at a known price. You can set the expiration date and strike price to anything you want (but lower strikes or farther out expiration dates will both increase the price of the option). As an example, if you buy a „August 18 Ford call“ then you have the right to buy 100 shares of Ford stock for $18/share at any time between today and late August (options expire on the 3rd Friday of the month).

If you buy a call option and the stock rises before expiration then chances are you will have some profits. But if the stock only goes up a little then you may lose money; depending on how much you paid for the option in the beginning. Because of this phenomenon, many investors have chosen instead to sell call options rather than buy them. They are taking advantage of the fact that options lose value as time passes. The risk is that the stock shoots way up before expiration. In order to counter that risk, the investor who sold the call option would buy the stock at the same time. That way, if he is called upon to deliver shares after they have run up in value, he already has them. This is known as a „covered call“ investment.

Let’s look at an example covered call. Let’s say you own 100 shares of Ford that you paid $17.50 for. You could sell a call option that expires in 3 months for a strike price of $18 for $0.90. You will receive $90 today but you take on the obligation to sell your Ford at any time in the next three months for $18/share (if the buyer of your option so chooses). If Ford is above $18 on expiration day then you will receive $18/share for your stock. But consider that you received 90 cents at the beginning, so it’s really like you sold your stock for $18.90 (sum of the strike price plus the option premium). So you still made money, but if Ford goes up to $21 you didn’t make as much as you could have.

Implementing a covered call strategy is not difficult. Ideally you will own 100 shares or more of several companies so that you can get some diversification (never invest a large percent of your net worth into a single investment). Because there are over 150K combinations of strike price, stock, and expiration date, it helps to have a covered call scanner to sort through the choices. There are many sites on the Internet that will help you learn about covered calls. Many investors feel that if you own stocks or ETFs and you’re not writing covered calls each month then you’re just leaving money on the table.

Born To Sells company web site has a free newsletter, blog and tutorial on covered calls. Born To Sell’s website offers detailed information about covered calls.