A great way to control your income is by investing in the stock market. There are some excellent stocks trading at low prices right now, which makes this the time to set yourself up to make some money. The first trade we will make is the covered call. It's the easiest of all options trades and a great way to enhance your investing strategy. A covered call is one in which you buy the stock and then sell the option. Selling an option is when you sell someone the option to buy a stock from you at a specific price at a specific time. Let's use US Bank as our example since that's who we will be executing our trade with. At the close of the market on Friday June 26,2009 USB was trading at $18.02. Now the first thing we have to do is buy the stock. Options only trade in "contracts", which means blocks of 100, so you have to buy 100, 200, 300 shares of stock etc. depending on what you want to trade. For our example we will use 100 shares, which will be 1 contract. So we buy 100 shares of USB for $1802. A look at the Sept 19 calls shows they are going for $1.10. All options contracts expire on the third Friday of the specified month, in this case Sept. The 19 is the amount of the stock price and the $1.10 is how much we are selling the options for per share. So what we are doing is selling someone the option to buy USB from us for $19 per share on the third Friday of Sept. 2009. We are selling them that right and they are paying us $1.10 for it per share. So we bought the stock for $1802 and sold the option for $110 ($1.10 per share x 100 shares). This gives a new total investment price of $1692, or $16.92 per share. If on the third Friday of Sept. the stock price is above $19 per share we will be called out of the option. That means the person wants to exercise it and buy the stock from us. We will then make a profit of $2.08 per share for a total of $208 in approximately 80 days. We paid $1692 and we sold for $1900. That's a 12.3% ROR, not too bad for only 80 days! If the stock price is below $19 per share we will not get called out and we keep the stock. We never have to repay the money for the option. We sold it and money is in our pocket. The other person purchased it from us because he believed the stock would be above $19 per share at the time of expiration (third Friday in Sept.). He would make money if the stock was trading above $19 per share. For example let's say the stock price was $21 per share. He would have the option to buy it from us at $19 then immediately sell at the current price of $21. That's a profit of $200-$110 (what he paid us for the option) for a total profit of $90. Of course if the stock price is below $19 his option is wothless and he loses the whole $110 he paid us for the option, that's the risk associated with options trading.
Hope this introduction to the covered call helped you to understand a little more about the financial markets. USB is a great stock to make this type of move on. I'll be making more posts as I see opportunities present themselves. Make it a great day.
