When someone writes (or “sells”) an option, he or she must deliver to the buyer a specified number of shares if the option is exercised. The writer has an obligation to perform a duty while the buyer has the option to take action. There are two general types of option writing: covered and naked.
In a covered call, the option writer already owns the underlying trading instrument and wishes to make extra money from the position. He or she can write (or sell) an option based on the expectation that the underlying’s price will move in a particular way. The buyer pays the writer a premium in exchange for writing the option.
If the option trades at a value that benefits the buyer, the seller is obligated to hand over the shares. If the option expires at a value that does not benefit the buyer, the seller retains the original shares. If the option writer does not own the underlying instrument, it is said to be a “naked” option. This is more risky than writing a covered call since the writer is still obligated to produce the specified number of shares of the particular contract (without already owning them). Definition courtesy of Investopedia!
I have told this story before, but one of my favorite clients was a very conservative individual. President of an engineering firm and in his mid-50’s at the time. During our initial interview I was able to determine that Don was more than conservative, he was risk averse. I say risk averse with a caveat; he did have a portfolio of stocks he held for the long term, just didn’t trade in and out. After several meetings we sat down to discuss an approach I worked out for him. Buy dividend yielding stocks and write at the money or just out of the money call options to gain additional income.
Monthly Income Project: HERE!
I have put together an embedded Google spreadsheet for members to use.
The above spreadsheet has the formula’s already in the cells. The first row with the instructions DO NOT CHANGE is there as an example for one to follow. The blank rows are there for you as a member to use. I copied down the cells from the example so the formula is there. Just change the data to suit the example you are using.
Access the Spreadsheet HERE! -> Begin your research for more income!