I showed you how to make money while you wait for a stock to decrease to a price you are willing to buy at using naked puts. Today I want to show you how you can make additional income on stocks after you own the stock. Let's say you own a stock and it hasn't really moved all that much one way or the other and you aren't making any money on the stock but you don't want to sell. Or lets say you own a stock that has increased a lot over the past few years and you think its hit its peak temporarily and you want to make some money on the stock while it stays the same or decreases slightly. I can show you how you can make extra income on this asset (stock) each week or month.
Here's an example. My grandparents have owned about 600 shares of 3M (MMM) over the past 20 years. This stock has been a great investment going from about $7 in 1983 a share to $110 where it is today. Looking at the chart this has been a great stock to own over the past 20 years, 2 years, 1 year, 6 months, etc. It seems it will just go up forever! But at $110 per share it may keep going up but with the uncertainty in the market the stock price could certainly stay the same or decrease some over the next year. In this situation I would recommend that my grandparents sell covered calls at a price about $5 above where it is now with an expiration about one month out.
A call option gives the buyer the right to buy a stock at a specific price up until the expiration date. If someone sells a call it will give the buyer the right to buy the seller's shares at a specific price up until the expiration date. The seller has the obligation to sell their shares if the buyer of the call exercises their right to buy. However, there are actions the seller of the call can take so they won't have to sell their shares if they don't want to.
With our example, we are going to look at the call options expiring either on June 21 or July 19. Looking at the June 21 expiration date, my grandparents could sell the $115 calls for $.23 per share so if they sell 6 contracts (600 shares) they will collect premium of $138. The July 19 $115 calls are .71 per share so they would collect premium of $432. They would make more money on the July calls but there would be more time before the calls will expire increasing their risk of the stock going over $115.
Let's say they decide to give this a try on the June 21 expiration. As long as they stock doesn't go over $115 per share over the next 19 days they will keep the premium and their 600 shares of stock. If the stock goes up to $115 or more my grandparents would have the obligation to sell their shares at $115. They still get to keep the $138 premium but they will have to sell their shares which is not what they wanted. At least they just made an extra $5 on the stock ($3,000) in 19 days so they aren't too disappointed. The risk they take is if 3M goes up a lot more than $115 my grandparents would have to sell their shares at $115 and wouldn't take advantage of they additional increase in price.
If 3M goes up to $115 or more and my grandparents don't want to sell their shares they would just have to buy back the calls they sold before expiration. They may lose money on the calls but the stock increase would more than make up for that loss so its really a win win situation.
Not all stocks are a good fit for selling covered calls so one would need to analyze if using covered calls is a good strategy. I would highly recommend selling covered calls in most situations but you have to be willing to sell your shares at a specific price. If you own 100 shares or more of a stock check out the call options above the current strike price to see if it is worth your while to make some extra income each month.
Anyone looking for some ways to get started collecting option premium please Click Here! or to find undervalued options Click Here!
Jonny
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