The key to generating income using option strategies is to sell “Time”. Time is a one-way coordinate. Taking advantage of quality of time which we call as “Time Decay” is at the heart of income strategies.
Here are the 3 income strategies that work for many and are most common.
Covered Call Strategy
This strategy is renting the stocks you already own. Owning a stock is a long term investment strategy. The option trader can sell an out-of-the-call option whose strike price is above the current stock price and collect the premium. The premium has only time value and no intrinsic value. The strike price is selected in such a way that the probability of the stock price exceeding it at expiration is extremely low. As time passes by, the value of the option decreases and becomes zero at expiration. The option trader keeps the premium collected at the beginning of the month and also keeps the stock as well. Repeating the process on all the stocks owned gets the cash flow into the account and compensates for the stock value dips.
Let’s say you own 100 shares of MSFT (Microsoft) which closed at $48.30 on Friday the May 15th, 2015. You think this stock is going to stay flat without too much fluctuation for at least a couple of months. The earnings announcement for MSFT was over and positive and the price already reflects this. Also the 52 week high for MSFT is $50.52. If you sell the July 15 call at the strike price of $50, you get a premium of $0.57. For 1 contract (100 shares) that is $57. It does not look like much but for 10 contracts it is $570. The probability of MSFT staying below $50.00 is very high. Now you have the cake (stock) and get to eat it too (premium collected stays with you).
What happens when the stock price goes over the strike price of $50 on July 19, 2015 expiration day. You stock will be called away at $50. I am sure you had bought MSFT at a much lower price. So it is still a wining trade at $50.57! You can always buy MSFT when the stock dips to a well established floor say like for example $42.50.
Please try this, you will only love it.
RKG.
