Selling Covered Calls

Say you have 100 shares of the XYZ corporation and you'd like to get some money out of those (and still have them after all is said and done if possible) and I am not talking about dividends.

Why not sell some covered call options? By selling a call, you give the right to buy the stock (all 100 shares of it) to somebody else, someone that's buying the call. Buying a call gives for the buyer the right to buy the underlying stock at the strike price. So, when you are selling a covered call, you are entering some kind of contract and can't sell the underlying stock until the expiration date. Oh yeah, the "covered" bit means that you own the stock (100 shares per option), as opposed to the "naked" call when you have zippo stock.

You see, when you sell the call (at a given strike price and expiration date), you get what is called a premium, in other words, some nice dosh. At expiration date, if the stock price is above the strike price, you can say bye-bye to your beloved 100 shares because somebody somewhere will exercise the option and buy the stock at the strike price. Now, if the stock price at expiration does not reach the strike price, you're golden because you get to keep your stock and since you already pocketed the premium, you can pat yourself on the back (how do you do that btw?) because that's a job well done.

What kind of stock is good for this kind of shenanigans? What you want is a stock that's not volatile and very liquid, probably a blue chip for starters. You don't want the stock to move fast in any direction. If it goes too high, that's bad because you're gonna lose it at expiration and miss the juicy capital gain (yeah, you finally had a winner in your portfolio and you lose it, great). If it falls like a rock, you can't dump the stock because it is tied until expiration.

Remember that you can buy back the option if you don't like the idea of having a stock you can't sell. If the stock tanks, the option price will go down so small profit right there for you before realizing you once again bought a crappy stock. If the stock goes up, the option price will go up. So you lose on the option but win on the stock since it's now yours again. Remember that the option price kinda follows the stock price when it is in the money (stock price above strike price), much more when it's way in the money (has to do with the delta of the option). Stock option pricing is much more complicated (there's the dreaded time value to take into account and volatility of the stock among other things).

If you don't know much about options, it does not hurt to read up about them. It will offer a lot of new "options" in your trading: leverage, protection, etc. It's really fascinating. Nah, not really.