| An options strategy called Covered Call
| |
| | exercised, you are guaranteed a profit;
|
| Writing is a conservative strategy
| |
| | 2. You reduce risk because premium in
|
| designed to reduce risk and increase
| |
| | effect reduces the price you paid for the
|
| income when investing in stocks. Briefly
| |
| | stock;
|
| stated, stock options are contracts in
| |
| | 3. Your annual yield is boosted far
|
| which you buy or sell the right to buy or
| |
| | above that of the dividend alone.
|
| sell. Although there are eight types of
| |
| | However, there are other considerations.
|
| options contracts, we're interested here
| |
| | For one, you are limiting your potential
|
| in low-risk "Covered Call Writing."
| |
| | profits. No matter how high the stock
|
| Here's how it works: Say it's August and
| |
| | rises, you won't sell for more than $50.
|
| you buy 300 shares of XYZ stock at the
| |
| | You can solve this problem by buying your
|
| price of $48 per share. XYZ pays a
| |
| | option back, in effect canceling it out.
|
| quarterly dividend of 50 cents per share.
| |
| | You would do this if you later think the
|
| Therefore, if the price never moves,
| |
| | stock will dramatically rise and you
|
| you'll earn 4.2% per year.
| |
| | don't want to miss the gains to be made.
|
| At the same time, you would participate
| |
| | Also, you have not reduced the risk that
|
| in Covered Call Writing. To do so, you,
| |
| | your stock may drop in price. The only
|
| you would "write three January 50 Calls."
| |
| | certainty is, should XYZ drop $25, your
|
| This means you are selling ("writing")
| |
| | option will not be exercised - a small
|
| the right for someone else to buy the
| |
| | consolation. To protect yourself, you may
|
| stock from you (they "call" it away)
| |
| | "buy a January 45 put" giving you the
|
| between now and the third Friday of
| |
| | right to sell your stock for $45. This is
|
| January at the specified price of $50.
| |
| | the opposite of what we've reviewed here,
|
| (All contracts expire the third Friday of
| |
| | and is designed to minimize losses,
|
| the month.)
| |
| | rather than protect gains.
|
| Each contract represents 100 shares,
| |
| | Because of the potential for price
|
| hence three contracts. The buyers pay you
| |
| | drops, you should choose a high quality,
|
| a fee (called a "premium") of $3.5 per
| |
| | blue-chip stock that fits your budget, an
|
| share, or $1,050. (The premium is based
| |
| | which offers a stable trading range,
|
| on the amount of time until expiration
| |
| | solid fundamental, high dividends, and
|
| and the spread between the current price
| |
| | good growth potential.
|
| and the "strike price," in this case $50.
| |
| | Covered Call Writing is not a reason to
|
| Therefore, the premium changes
| |
| | own stocks, but the strategy might be of
|
| constantly.)
| |
| | help if you already own them. Prior to
|
| Assuming you don't cancel, only two
| |
| | opening an account, you must receive and
|
| things can happen next: The contract will
| |
| | urged to read "Characteristics and Risk
|
| get exercised or it will expire worthless
| |
| | of Standardized Options," which is
|
| in January. Either way, you keep the
| |
| | published by the Options Clearing
|
| $1,050. Clearly, this strategy can yield
| |
| | Corporation in cooperation with NASD and
|
| big rewards. Among the advantages are:
| |
| | all major U.S. stock exchanges. The
|
| 1. You are establishing a profitable
| |
| | booklet is available from any broker or
|
| sell price the day you buy the stock. If
| |
| | financial advisor.
|
