Using Options To Turbocharge Your Returns
Most people who lose money trading options do so because they buy options, let’s see how to sell options and be on the winning side.
Two kinds of options are:
Put: a contract giving the buyer the right, but not the obligation, to sell a stock at a specified price by a specified date.
Call: a contract giving the buyer the right, but not the obligation, to buy a stock at a specified price by a specified date.
Hypothetical example: shares of Microsoft are trading at $25, in July an investor buys the January $30 call for $1. This means the call buyer has the right, but not the obligation, to demand the shares of Microsoft at $30.00 from the call seller at any time between now and the third Friday in January. The $30 price is called the strike price.
Buying a put on a stock you own is like buying insurance.
Covered Call: when an investor owns shares of a company and sells a call option against those shares and agrees to sell those shares to the call buyer at the strike price.
If you sell a call at a strike price that is higher than the price you paid for the stock, you cannot suffer a loss as a result of the call being exercised. You only have a loss of opportunity if the stock goes higher than the strike price.
Stocks that are more volatile have higher priced options.
If you’re looking for current income, selling options is a terrific strategy to boost your returns. But it is not necessarily for long-term investing to build wealth and reinvest dividends.
Selling covered calls is a great way to generate current income.
Selling puts is a great option for dividend investors. It gives you an opportunity to buy stocks cheaply and wait for costs to go down while collecting income. You should only sell a put option if you want to own the stock at the strike price and have the money to purchase it.