Concept for good investment and money making

In my last posts I explained how Selling Put’s can be used by the conservative investor to buy stocks at a lower price, or how to make an income selling them on a regular basis. See the articles here and here.

In this article I’ll talk about how a very similar process, Selling a Covered Call on your existing stocks to enhance your income.  It’s called “Covered” because you already own the stock in your account.

Summary

1. When you “Sell a Covered Call” you give someone the right to buy your existing stock at a certain price (Strike Price), while collecting an immediate cash premium.
2. Conservative investors use this trade to enhance their income on stocks they already own, like getting an extra monthly dividend.
3. Using Facebook (FB) stock as an example. I already own Facebook in my account, it has been a great performer. Today April 29^th Facebook is trading at $116.50/share, after a recent jump in price.
4. I’m looking at the May 20^th $121 Call Option, it pay me a premium of $1.07 per contract (100 shares).
5. Therefore, if I Sell these Call’s I get $107 immediately in my account per contract. I am looking for the price of FB to be below $121 by the May 20^th , the Expiration Date.
6. If the price of FB is at or above $1210 on May 20^th I must either sell my stock, or just buy out of my Call position.
7. Another way to look at this is if my shares get “Called Away”, I will get $5.57/share in profit. $1.07 was the Call Option Premium, plus $4.50 from the price increase from $116.50 to $121 per share. That is a 4.8% return in 30 days or about 57% annualized.
8. My favorite web site shows that this trade has an 73% chance of “expiring” which I want it to do, and my return is .91% for 30 days or 15.81% annualized.
9. As a sanity check I check out the FB stock chart and see that the stock is trading at about an all-time high after a recent increase.
10. This might be a nice safe little trade.

Here is what a Call contract looks like in your account. This contract is FB 160520C121, it looks cryptic but it’s actually easy to understand. FB (the stock) 160520(Expiration Date of 05/20/16), C121 (means a Call with a $121 Strike Price).

Here is what a Fidelity order entry screen looks like for a 3 contract transaction.

I always double check my Call Options trades with my favorite Options site: http://www.stockoptionschannel.com , here is what it said.

Here is what Facebook’s stock chart looks like:

So, can you make money doing this, yes, once you understand it. Here is a copy of my monthly Options Trading spreadsheet for July 2013. You can decide how much risk/reward you are willing to take. Look at the Call Options.

In my last post I explained how Selling Put’s can be used by the conservative investor to buy stocks at a lower price during almost any market conditions. You can read that story to better understand how Selling a Put works.

In this article I’ll talk about how to either make a living or supplement your income by Selling Put’s for a profit.

Summary

1. In this case we want to Sell Put’s on stocks what we just want to collect the premium on, and not necessarily want to own the stocks.
2. Using Regeneron (REGN) stock as an example, the current price today April 20^th is $400/share.
3. I’m looking at the May 20^th $360 Put’s, paying a premium of $5.50 per contract (100 shares).
4. Therefore, if I Sell these Put’s I get $550 immediately in my account per contract. I am looking for the price of REGN to be at or above $360 by the May 20^th Expiration Date. This is roughly 10% below the current selling price.
5. If the price of REGN is below $360 on May 20^th I must either buy the stock, or just buy out of my Put position. My favorite web site shows that this trade has an 81% chance of “expiring” which I want it to do, and my return is 1.42% for 30 days or 17.24% annualized.
6. As a sanity check I check out the REGN stock chart and see that the lowest price in the last 12 months has been about $359 and the stock has bounced off its bottom and is above its 50 EMA.
7. This might be within your risk tolerance.

Here is what a Put contract looks like in your account. This contract is REGN 160520P360, it looks cryptic but it’s actually easy to understand. REGN (the stock) 160520(Expiration Date of 05/20/16), P360 (means a Put with a $360 Strike Price).

Here is what a Fidelity order entry screen looks like for a 3 contract transaction.

Here is what the REGN stock price chart looks like, notice the move above the 50 EMA live, a positive sign.

I always double check my Put Options trades with my favorite Options site: www.stockoptionschannel.com , here is what it said. This trade has an 81% chance of “expiring” worthless, which I want it to do, and my return is 1.42% for 30 days or 17.24% annualized.

So can you make money doing this, yes, once you understand it and manage your risk. Here is a copy of my monthly Options Trading spreadsheet for July 2013. You can decide how much risk/reward you are willing to take.

You’ll notice that the above sheet also shows some Call Options, I’ll explain these in a future article.

Selling Puts (Options) can be used by a conservative investor to either buy stocks at a lower price or generate income during almost any market conditions. In this article I’ll talk about buying stocks at a lower price.

Summary

1. As a conservative investor, you can get paid to buy your favorite stocks at lower prices.
2. Using Apple stock as an example, the current price was $109.34/share, I wanted to buy it at $105/share, I made $116 in 2 weeks waiting for it to drop.
3. In this case it did not drop to $105, so I got to keep the $116 and try again. If Apple would have dropped to $105 or less by my Expiration Date, I would still keep the $116, and my order would have been processed for 100 shares of Apple @ $105. My actual cost for the Apple stock would only be $103.84 ($105 less $1.16).
4. This process is quite simple, it’s called “Selling a Put” option
5. One Options Contract is 100 share of stock

Here is how it works: 

Selling a Put – This pays you an immediate Premium ($$) for agreeing to buy shares at a future date (Expiration Date) at a specific price (Strike Price). You cannot lose the premium, you get it immediately posted to your cash account. The Put allow you to buy your favorite stock at a lower price and get paid until it hits your price. Selling a Put is also called “Writing a Put”.

Here is what a Put contract looks like in your account. This contract is AAPL 160408P105, it looks cryptic but it’s actually easy to understand. AAPL (the stock) 160408 (Expiration Date of 04/08/16), P105 (means a Put with a $105 Strike Price).

Here is what a Fidelity order entry screen looks like.

1. The top portion shows the current stock price for Apple (AAPL).
2. The Action is “Sell to Open”, this means you want to open an options position, by “selling”.
3. Quantity is the number of Options contracts, keep in mind that an options contract is always 100 shares of a stock. 1 contract = 100 shares of Apple.
4. Pick an Expiration Date, this is when the contract will expire, on these kind of trades I usually keep the date to 3 – 6 weeks.
5. Strike (price) is the price you’d like to buy the stock at, in this case I’d like to buy 100 shares of Apple at $105/share, it was $110.32 at the time.
6. Notice the Bid and the Ask Price. This is the amount of premium you will get, you’d like the highest amount you can get. I always use a Limit Order and wait for a decent price.

In my next post I’ll discuss how to use Selling Put’s as a way to make additional income, assuming you don’t want to actually own the stock, just collect the premium on each trade.