Using Options To Make Money
Options offer the investor a way to control thousands of shares of stock without having to actually buy the shares. These special contracts are a way to use leverage to increase the rate of return on a stock investment. Many investors have trouble understanding call and put contracts so they shy away from them. However, it is worthwhile to take the time to learn how they work because they can be very profitable.
The most conservative strategy using calls and puts is called the “covered call strategy”. It is surprising that more ordinary investors do not take advantage of this strategy. It is a very safe technique that generates cash flow. It is a way of “renting” the common stock shares in your portfolio. It does not require a large margin account. You can set up this program with only minimal monitoring.
In the event the covered call contract is in the money there is a way to terminate the trade for only a minimal loss. You terminate the trade by buying the same call contracts that you sold. This transaction offsets the first transaction when you sold the call contracts. In reality, most call contracts expire out of the money. This means they expire worthless, which the seller of the contract wants.
This trade is extremely liquid. It is easy to terminate the trade for only a minimal loss, but this happens rarely because most call contracts expire with no value. This mean as a seller of the contract you made a nice profit off of the premium you received when you sold the contract. Now you may turn right around and sell another call contract on the stock and make some more profit.
Besides the income the covered call method provides, the investor will have peace of mind knowing that this is a low risk venture. Some call and put trades are very complicated and carry a large degree of risk. The individual investor should not confused the covered called strategy with risky complex trades like swaps and straddles and so forth.
Covered calls are so safe that stock brokers do not even require strict net worth requirements or margin accounts. Other types of trades require the investor to put up collateral for large risky trades.The fact that the stock brokers consider this a safe investment is telling. Information is important when you are considering investments. It is important for the individual investor to understand what they are investing in.
The power of calls and puts is that you only have to put up a fraction of the money to control a large block of common stock. This is leverage. When leverage works in your favor you can make huge profits. Of course, on the other hand, if the market goes the wrong way you can sustain larger losses.
If you are an individual stock investor with a large portfolio then you are the perfect type of investor to use covered call options to earn income. This is an income earning technique that is risk free and simple. A stock portfolio can generate consistent and steady income streams. This system is easy to administer, but it does require a sizable stock portfolio.
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