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Earn
An Extra 5%-10% Per Month Page
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- The following strategy is
known in the market as Covered Call Writing and
is probably one of the safest ways for an investor
to become involved with stock options. The
strategy allows long term investors to increase
their monthly portfolio gains with very little
effort on their part and is an excellent cash flow
builder. It essentially allows an investor to be
paid twice for the ownership of their stock.
In this strategy you are simply selling an out of
the money call option against the stock that you
already own, and it works best if practiced in
neutral to bullish market conditions. This
technique allows investors to not only profit from
a gradual increase in the stock price but also
profit every month through the collection of a
call premium. Since all stock options decay over
time and the rate of decay increases in the final
month prior to expiration, it is recommended that
you never sell an option that has more than 30-45
days until expiration. The following example is
based on an investor who owns 100 shares of EMC
Corp. on May 8th 2000. Trading
commissions have been eliminated to simplify the
example.
In this example you
own 100 shares of EMC Corp. (EMC). and the current
stock price is 138 1/8. You would want to sell an
option with a strike price high enough that the
stock will probably not reach the price prior to
expiration. It is also critical that you not sell an
option with more than 30 to 45 days until expiration in
order to benefit from the increased rate of time
decay. In this case our best bet would be to sell
the June 145 call option for which we would receive
a premium of 8 1/8 X 100 shares or $812. This money
would immediately be placed into our account and a
hold would be placed on our 100 shares of stock,
which could not be sold until the option expired in
39 days. At this point lets go through some
scenarios of the stock increasing or decreasing in
value and compare our situation with that of a
person who simply owns the stock.
Stock
Price Goes Up:
If the stock price
rose to a level just below the strike price of our
option on expiration day (i.e. $144 per share) the
option would expire worthless and we could keep the
$812 premium plus retain the stock at its current
value.
Owning Stock Alone:
$144 (current price) minus $138 1/8 (purchase price) =
$5 7/8 per share profit or $588.
With Covered Call:
$144 (current price) minus $138 1/8 (purchase price) +
$8 1/8 (call premium) = $14 per share profit or $1,400.
If the stock were to
rise above the option strike price prior to
expiration day (i.e. $147 per share). In this case
you would be called out and would get to keep the
option premium plus be paid $145 per share for your
100 shares of stock.
Owning Stock Alone:
$147 (current price) minus $138 1/8 (purchase price) =
$8 7/8 per share profit or $888.
With Covered Call:
$145 (current price) minus $138 1/8 (purchase price) +
$8 1/8 (call premium) = $15 per share profit or $1,500.
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