The stock market can be a scary and formidable place for the inexperienced trader, but there are simple strategies that can multiple your profits with very little to no risk at all!
Writing covered calls’ or options is one of the easiest ways to do this.
But what are options exactly?
Lets say you own 1,000 shares in ABC Company. At this time the shares are worth $6. You can sell the option to buy these shares for say $7(known as strike price) within the next 30, 60 or 90 days. You write 10 individual contracts (100 shares per contract). This means that people will pay you a premium’ of lets say 50 cents a share (Price may vary) for the option to buy these shares at the set price, no matter how the price may change over the time period.
The short-term benefit of this is that if someone thinks your shares will rise to a price of $8 before the contracts have expired they can buy your option generating an immediate profit of $500 for you, making a 8.3% profit (taxes not included).
Where is the catch?
Lets say the shares did rise to $8 and the option was exercised, you would have to sell your shares at the locked-in’ price of $7 a share. Which means you have missed out on an extra $1,000 profit if you were to sell them at the current price of $8.
Why would anyone do this then?
If the shares had declined in value to $5, the person who bought the option could still purchase the shares from you for the locked-in’ price of $7. They would be losing $2,000. If the option is exercised you sell your shares and make a $2,000 profit, plus the $500 from the actual contract.
As the option cost $500, he could let the option expire and only lose $500 and you are left with your shares still, free to repeat the process as many times as you like.
With the right stock you could repeat this process several time a year adding between 10% and 50% return on your portfolio. Experts say that around 80% of these options expire. According to that statistic you will make a quick profit 8 out of 10 times. If those were the odds for lotto, wouldn’t you start playing?