Today, I'm going to let you in on one of the market's
It turns out investors are willing to pay you to sell stocks
you already own at a profit.
You read that right.
And you want to know the funny thing? Often, you don't even
end up having to sell the shares. You simply take other guy's
money. And rest assured, it's all perfectly legal. So I can't
believe investors are missing out on these payments.
For those who are unfamiliar with this simple technique, it
may sound strange. But savvy investors are using it to generate
thousands of dollars in extra income every year.
It's one of the easiest and safest ways to generate 20%-plus
returns on a regular basis.
Once you've mastered the technique, I wouldn't be surprised if
you stopped trading stocks or buying and holding investments.
That's how powerful this strategy is: It can drastically
improve the way you make money in the markets. That goes for
conservative income investors and aggressive traders alike.
The technique involves selling options -- specifically covered
A call option gives the buyer the right -- but not the
obligation -- to buy a stock from the call seller if it's trading
above a specified price (the "strike price") before a specified
When you sell a call option, you have the obligation to sell a
particular stock stock at the strike price if it should rise
above that price before the option expires. A covered call
strategy requires you to sell call options on a stock you just
bought or already own.
When you sell a call, you generate a premium -- or what we
call "instant yields" -- upfront as pure profit.
To understand how it works, let's take a quick look at an
example of a covered call trade for
that I shared with readers recently.
Ctrip.com isn't a household name in the United States. But in
China, it is one of the country's largest travel sites. You can
think of it as the equivalent to
in the United States.
Travelers use Ctrip.com to book air, hotel and train
accommodations. The price of the stock -- which trades in the
U.S. on the Nasdaq -- has more than doubled in the past year
But what most investors don't realize is that the stock is a
great candidate for writing covered calls, and you could earn
thousands of dollars doing so right now.
When I recommended this trade, CTRP was trading near $38.95.
So if you bought 500 shares of CTRP, it would have cost $19,475.
Once you own shares, you are eligible to write a covered call on
The CTRP June $45 calls were priced at $3.55 at that time.
That means the call option expires in June, and has a strike
price of $45. Meanwhile, each contract you sell brings in $355 (a
contract controls 100 shares) the instant you sell the
If you owned 500 shares, that means you could write five
covered call contracts. That would rake in $1,775 in income
instantly. This money is yours to keep, no matter what.
If the shares stay below the $45 strike price, then the
options you wrote expire worthless. When you sell covered calls,
this is a desirable outcome, because it means you keep the shares
and can write more calls on them in the future.
So you get the $1,775 in income, plus you keep your 500
shares, allowing you to repeat the process all over again.
If you repeated this process twice a year (giving time for the
June options to expire), you'd earn about $3,550 in annual option
income while still owning 500 shares of the stock.
Earning $3,550 on your $19,475 investment is the equivalent of
earning an 18% yield from the stock.
Now, if the shares rise above $45 before the option expires in
June, then you would sell your shares to the option owner for
That might seem like a bad thing. But remember, if you bought
the 500 shares at the recent price of $38.95 and sold them at
$45, you've earned about $3,025 in capital gains. On top of that,
you also have your $1,775 in option income. That's a total gain
of $4,800 on a $19,475 investment, or 24.6% in less than six
But what if you don't want to invest $19,500 in CTRP to unlock
this income? That's the good thing about covered calls.
First, options are fully scalable. That means if you want to
invest less, you can do so, but you will receive a smaller
payment. Likewise, investing more increases your payment. Here
are the payments you can earn on various investment sizes, given
the prices mentioned above:
Second, options are available on almost any stock. All major
companies -- and hundreds of smaller ones -- have options that
trade on the open market. Whether you want to use options with a
big name like
General Electric (NYSE:
or a smaller company like
Green Mountain Coffee Roasters (Nasdaq:
, you can do so. And yes, that means you can write covered calls
on the stocks you already hold in your personal portfolio.
Action to Take -->
Selling options is the closest thing to a no-lose situation in
the financial markets. The secret is only selling options on
stocks you want to own. If you follow this one rule, you're ahead
of 90% of options traders.
Selling covered calls can be part of a conservative or
aggressive investment strategy. It can also be used as a stock
selling strategy to ensure that you sell when stocks hit their
target price. Best of all, it puts you in command of how much
income you receive from your holdings, even if the stocks don't
pay a regular dividend.
This article originally appeared on
'I Can't Believe Investors Are Missing Out On
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