Typical situation: You do the research, you buy a stock on the market, you hold the stock, the stock goes up and down, and, often, you sell the stock to the market – for more than you paid, I hope.
But… what most investors don't know is that you can get paid just for, essentially, offering the stock for sale!
You can sell someone an option to buy a stock you own at a specified price at an appointed time.
It's true: It's one of the easiest, most basic options trades there is – and you can do it the minute you get level 1 trading clearance from your brokerage.
If you're a trading rookie, you can do it with no sweat. If you're a pro, you can practically do it in your sleep.
Whether you want a weekly payday, or a monthly or even yearly payout, you can use any stock you own outright to make this "instant income" move work.
Here Are the Basics You Need to Know
The strategy I'm talking about is called the "covered call."
Let's go back to Options Trading 101 for a quick refresher. (It'll do everyone some good!)
When you buy a call option, you're buying the right, but not the obligation, to buy a stock at a specific "strike" price.
But when you "write," or sell a call, you're selling the right, but not the obligation, for someone else to buy a stock from you. You're obliged to sell the stock at the strike price should the buyer in the contract want to buy.
If you own the stock, you're covered – you have the stock on hand to sell. You're selling the right to buy a stock that you own; you are writing a covered call.
(There is such a thing as a "naked call." That's a call for which you don't own the stock, but "borrow" it on margin. The thing is, a naked call has theoretically unlimited downside risk, so it's an advanced move with stiff margin requirements. I mention this just to make you aware; we won't be talking about or doing this.)
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Now, that option's going to have an expiration date, a date on which the contract will either expire worthless or the option will be exercised. That could be a week, or a month, or several months out.
But, when you write an option and someone buys it, you get paid the premium pretty much instantaneously! That's fast money in your pocket to do whatever you want with.
There are a couple more things you should know, though.
For one thing, one option contract is for 100 shares of stock. So you must own at least 100 shares of a stock to be able to do this strategy. (There are other strategies where you can offset that cost of ownership; one way to do that is to buy the option back.)
Let's say you owned 150 shares of Moderna Inc. (NASDAQ: MRNA), the pharmaceutical company that's a leading candidate for clinching a COVID-19 vaccine. You'd write a covered call for just 100 shares, meaning you might have to sell 100, but you get to keep a 50-share position in MRNA.
So, whatever the premium is, multiply by 100. For example, if you sell a covered call for $1, you will actually collect $100 per contract.
As the option seller/ stock owner, you cannot, for any reason, sell that stock while the contract is still "open," before the expiration date.
And the option buyer/ would-be stock owner has the right to buy that stock from you at the strike price anytime, up to and including the expiration date.
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In other words, your stock could be "called" away at pretty much any time the option's in effect.
But – and this is the biggie – whether they buy the stock or not, you get to keep the premium they paid you.
Let's run through two scenarios:
Let's say after three weeks, your stock is called away – you end up selling the stock for a $1 gain per share, or $100. You also keep the $100 premium you collected.
That's $200 – a 4.5% return on investment in just three weeks.
Or, let's say you own a stock for $44 and you write a $45 covered call expiring three weeks out for $1.
Again, you collect your $100 premium right away.
But this time, at the end of three weeks, the call buyer doesn't exercise their right. You still own the stock, but that $100 premium is a 2.27% return on investment.
As long as you own the underlying stock, you can write covered calls month in, month out, till the cows come home.
That's hardly exciting, but think of it over time. If you encounter either of these hypothetical moves every month, you end up with anywhere from 27% to 54% in profits. That's income.
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About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.