When you first begin learning about covered call options, it is easy to become a bit overwhelmed by the language and information. The truth is, covered calls are not much different than other investment strategies. The key is to align yourself with trusted sources of information and to learn as much as you can before investing. A good covered call strategy can lead you to a sound money making source for many needs, but it is not a “get rich quick” scheme. If you are looking to become rich quickly, then you should look elsewhere. If instead you are interested in a steady, dependable way to earn some money, then covered calls might be what you are looking for.
A few commonly asked questions among new covered call investors:
What are covered calls?
A covered call is an investment in two parts. First, buy 100 or more shares of stock. Second, sell a call option against that stock. Options control 100 shares each, so you sell one call option for every 100 shares of stock you bought (if you bought 500 shares you could sell 5 call options, for example). The combination long stock + short call option is known as a “covered call”.
Remind me what “long” and “short” mean in the context of stocks.
If you are “long” a stock then that means you own it. You bought the stock and if it increases in value then you will have a profit. If you are “short” then it means you have sold a stock that you do not own. In the future (at some point) you will have to buy it back to “cover” your short position.
How do I make money with covered calls?
You make money by selling call options to other investors. The “premium” (money) you receive is yours to keep, no matter what happens to the underlying stock. Once the option expires you can sell another one.
When is a good time to sell call options?
Selling call options is a year-round activity. You can do it every month, and generate income each month. The only time you don’t want to do it is if you expect the stock to shoot up in the near term (perhaps just before an earnings announcement where you feel it will be good news). Since most options are sold for 1-month time frames, and since most stocks don’t shoot up during 1 month (at least, not every month), you can sell calls each month to collect regular premiums.
Covered calls are the most popular options-based strategy today. Investors have been collecting monthly premium for years. Everyone who owns stocks should do it. If you’re not selling calls against ETFs and stocks you own then you’re not optimizing your portfolio yield as well as you could be.
Learn more about covered call investing. Stop by Born To Sell where you can see a fast covered call screener and how it can help you start earning income today.