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Investing and options trading may seem like polar opposite, incompatible strategies. But using options can actually be one of your savviest strategies for boosting retirement income.
Investing during your retirement years is a little different than investing in preparation for them. When you were young and just starting out, you could take a lot of risk. If your investments did not quite work out, you had plenty of time to get back on track.
When you were in your prime earning years, you likely started to think about the future, mixing stocks and bonds with some alternative investments for a little spice. Maybe some gold, or a limited partnership, or even angel investing with a friend.
But retirement is usually no time for speculation. For most people, sticking with reliable dividend stocks has been a successful strategy for safely growing a retirement portfolio. After all, your retirement fund is there to supply you with income to live the life you want, and stability and income is what you want.
That means investors shy away from options, looking at them as too risky or volatile for retirement. But that doesn't have to be the case. What many investors new to options don't realize right away is that there are dozens of different strategies using options, many of them designed to lower your portfolio's overall risk. These aren't speculative "jackpot" types of trades, but sober-minded strategies designed to help you meet your goals.
Money Morning's options trading specialist, Tom Gentile, has a strategy using options that can turn stocks you already own into income payers.
Options 101: It's never been easier to learn how to trade options, especially with our free guide from top trading expert Tom Gentile. Click here to get it.
The strategy is called "covered call writing." That's a fancy way of saying that you sell calls on stocks you already own.
And selling calls is as easy as clicking a button. There's no complicated math or special brokerage lingo you need to memorize.
How to Sell Calls for Retirement Income
Selling a covered call is simple. All you need to do is own at least 100 shares of a stock (options contracts are for 100 shares of stock) and then go to your brokerage account and look for a call option on that stock with a strike price and expiration date you're comfortable with, then sell it.
When you sell a call option, you collect the premium, or cost of that option immediately. No matter what happens next, that premium is yours to keep. And if you do it over and over, it can turn into a nice income stream.
But there are three things that can happen when you sell a call option that you'll need to know about.
First, if the stock price stays the same over the life of the call contract, then you pocket your premium. Congratulations, you just got paid to hold a stock in your portfolio!
Second, the stock's price can drop. If the stock falls, you might not be too happy, but stocks move up and down all the time, so you're expecting some fluctuation in your portfolio anyway. But this time, you collected cash on the option you sold. And don't forget, you still own the stock that likely pays you a dividend and has the potential to move back up. After all, that's why you bought it in the first place.
Third, the stock can go up in price and make the call you sold actionable. This is where you have to pay attention. If the stock goes up, the new owner of the option may decide to call your stock from you. That just means they get to buy your stock at the price specified in the contract. You get that price, which will be a profit from when you started, and you still get to keep the premium. You can then take that cash to buy shares of the stock you owned if it dips or buy a new stock and start the process all over again.
Not too shabby. The only real risk here is if the stock you own goes on a massive tear upwards and you miss out on those gains. But chances are you're owning stable companies in your retirement portfolio, and this strategy will give you solid income on those stocks.
Just remember, every time you sell a call option and your stock is not called away, you can bank your profit and sell a new covered call to do it over again. And you can keep doing it, every few weeks, if you want.
If a low-risk stream of income does not fit a retirement plan, then what does?
To learn more about how Tom uses options to help his subscribers, make sure to check this out...
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