Covered Calls – A Simple Strategy to Monthly Income

Many people go cold at the idea of options trading…it sounds complex, risky and of course it does take some capital investment. But if you own or are thinking of owning shares, you could be earning a monthly income right now. The covered call strategy is effective and really easy to understand and implement. Basically you are writing a contract in which you agree to sell your shares at a set price on or (in some markets) by a set date. For this agreement, you are paid a premium or income. You get to keep this income whether or not the buyer chooses to exercise their right to buy the shares off you.

In a scenario where the share price goes up, you will likely be exercised and your shares are bought from you at the agreed price irrespective of the actual price on that day. If the share price goes down and the buyer can buy the shares at market for a cheaper price, the calls will likely not be exercised. You get to keep the income and the shares and you can repeat the whole thing again the next month! In this way, you collect income from your capital investment, a bit like collecting rent from a property. Sound complicated…it really isn’t and with online brokers putting on the trades is quick and easy.

So what’s the downside? Well, owning shares always carries some element of risk. Of course the underlying value of the shares can go down as well as up and erode your capital investment? Also if the share price goes up, you may be missing out on the capital gain as you will have to sell your shares at the price agreed regardless. However, if you choose your stocks wisely, diversify across categories and put some stop losses in place to protect against a particularly badly performing stock (or buy put options), then you can mitigate your risk. If not exercised you can repeat the process month on month slowly milking your investment and compounding your investment (i.e. buying more shares with the accumulated income) for a very healthy overall return. You also have to remember that you only realize your share gains when you sell your stocks whether the covered call strategy generates actual monthly income.

In short, covered call writing is actually a pretty conservative and effective income strategy. It takes a little bit of work and knowledge investment to understand the concept and select the right stocks but once you have your formula, it can be surprisingly easy to implement.

For more information on investment strategies, returning to work after kids, interview tips, resume writing or research into legitimate ways to make income from home, please visit http://www.worklifeafterkids.com/