Investors are always looking for ways to enhance their income without taking unnecessary risks. As you get older the more conservative you become. We just can’t afford to risk our retirement income. One way to achieve additional income in your investment portfolio is to Sell Calls and Puts.
Most investors have no idea what Options are and therefore immediately believe they must be risky. The fact is, Selling Cover Calls and Cash Secured Puts is a very safe, easy and conservative way of enhancing the returns for your investments.
Selling a Covered Call – This pays you an immediate premium (Premium) for giving someone the right to buy your shares at a future date (Expiration Date) at a specific price (Strike Price). You cannot lose the premium. Covered Calls allow you to enhance gains instead of just “buy and hold”. For example, today you buy 100 shares of Facebook (FB) at $53.81/share $5,381 total cost. You then sell (write) a Covered Call for FB, get an immediate premium of $1.17/share and agree to sell your 100 shares on January 10, 2014 at $56.50/share. Therefore if FB hits $56.50 on January 10th you will have made $269 on the stock, $117 Call Premium, total $369 or 7%. A 7% return in less than 1 month is a pretty good return.
You can learn more about Covered Calls from the CBOE, the world’s largest Options Exchange:
Selling a Cash Secured Put – This pays you an immediate premium (Premium) for agreeing to buy shares at a future date (Expiration Date) at a specific price (Strike Price). You cannot lose the premium. The Put allow you to buy your favorite stock at a lower price and get paid until it hits your price. Using our FB example above, lets say you would like to buy FB at only $50/share. You would Sell a Put for a January 18th $50 Strike Price and immediately get a $1.04/share premium. Let’s say that on January 18th FB is selling at a price higher than $50, your Put Option expires and you still get to keep the $104 premium. Your return was 2% ($104/$5000) for about 1 month, that’s 24% annualized.
In future postings I’ll give you some helpful tips on how to use Calls and Puts while protecting yourself from losses.