Writing Stock Options for Income
Selling calls or puts on stocks that you own is called covered options trading. Writing stock options for income is a time honored way to gain from stocks that you own. The way writing stock options for income works is that you own a few hundred shares of a very stable stock. You know that it very unlikely that the price of the stock will change very much. So, you sell call options on the stock. This is referred to as writing options. You do not expect to have to sell the stock as it is a very stable stock. However, there are options available on your stock. These options contracts pay a reasonable amount for the right to buy 100 shares of your stock at any time within the contract period. Because you will probably not have to sell the stock in question you will simply gain a little income from writing stock options for income. Here is a little about how options work and someone who own a stable stock can make money in this manner.
In selling American style stock options the buyer has the right to exercise the options contract at any time up until contract expiration. This differs from European style options in which the buyer can only exercise the contract at expiration. The buyer will only do this if the price of the stock raises enough for him to make a profit. Thus when you are writing stock options for income you will want to analyze your stocks and only sell call options on stocks that you believe will not go up in price during the contract period. The beauty of limiting yourself to calls when writing stock options for income is that you will never lose money. If the stock price goes up you will have to sell the stock and could even miss out on a big price increase. But you will be compensated to a degree by the premium that you get for selling the call contract.
Stocks that Trade in Channels
There are many stocks that trade in channels. They are strongly influenced by interest rates or other factors in the economy. Thus they go up and down according to external events.
Read more at www.Options-Trading-Education.com