One of Michael Campbell’s favorite investment strategies is to sell options against his investments. Selling options can be an ideal way to add income to your account. There might be no guarantees in the stock market, but that doesn’t mean you can’t minimize risk, and generate income.

Here’s an example of Selling Call Options:

You have 500 shares of XYZ stock trading $20 a share and valued at $1,500.

You sell (writes) 5 call option contracts (1 option contract covers 100 shares) @ $300 x 5 and receive $1500. This premium of $1500 covers a certain amount of decrease in the price of XYZ stock (i.e. only after your initial $10,000 stock position has declined by more than $1500 at the time of the option expiry would you lose money overall). 

Let’s look at the possible scenarios…

1)      The Covered Call Option expires worthless.  This happens if the current market price of XYZ is below the strike price ($20) of the call option on its expiration date.  This is fantastic because you were paid income up front and now that the time of the option is over, you are no longer obligated to anything.  You can forget all about the option and continue to hold the stock, or you can repeat and sell another covered call option.

2)      The Covered Call Option is exercised.  In this case, you were paid money up front and then you were obligated to sell the stock at the agreed upon price ($20) on the expiration date of the call option. This is still profitable news because you owned XYZ at $20, took in the $1,500 you were paid to sell the Call Option, your profit from the date you made the decision to sell the call option is $1,500 / $10,000 or 15%.

The point is that you are increasing your guaranteed income by being willing to trade away some of your upside profit potential. 

Here’s another example in a visual form:

There are other option strategies, for example to learn how to protect yourself from losing money by buying insurance in the form of a put option, go HERE