Selling covered calls
Note: Fiddling around stock options is not okay for the novice or even the intermediate investor, stock options are just a totally different ball game. However, if you do think that you are ready to dip your toes in the stock option market selling covered calls is one of the safest options plays there is.
Selling covered calls is where an investor sells the call option of a company [which means the investor is anticipating the stock to perform badly] while owning the same number of shares of the company. This may sound contradictory, because it is! However it can also be an easy way to get a decent return on your money.
This is how you win with the method of selling covered calls: If a stock is trading at 50 dollars a share and you sell calls for the company to go to 60 dollars a share and the company only gets to 55 dollars a share by the time the call expires, then it should be a win-win situation for you. You owned shares of the company that appreciated 10%, 55-50= 5/50= .1 X 100= 10%! Also, the calls you “shorted” are now worthless, which means you have to pay nothing back.
This is how you lose by selling covered calls: Lets use the example above but pretend the stock skyrocketed to 70 dollars a share by the time the call option expired. Yes, you did make a 40% profit on the shares of the company you owned, but the calls that you now have to cover are very expensive. You would end up losing your shirt with this scenario.
If you have extensive experience in the stock market and you know what you are doing, you can do well by selling covered calls. However most will simply fail in the long run by trying to attempt to do something that is way over their head. 90% of investors should just stick to buying shares of solid, profitable, dividend paying companies.