Video Tutorial Overview
There are several ways to gain profit or income from an investment in a company’s stock. These include: 1) Buying the shares for a good price and then selling them when the price for the shares goes up. Of course, you don’t know if the price will go up. 2) Buying an investment that pays monthly or quarterly dividends. This is a good way to have a consistent stream of income. 3) Give someone the opportunity to buy your shares at a price you determine using an option known as the “Covered Call.”
Before we get to the video, here are some basics.
What is a Covered Call?
Covered calls are options you can sell for immediate income if you own at least 100 shares of a company’s stock. If you own the shares, you have the right to sell them at the current market price. But you can also hold onto your shares and sell a covered call instead. The “call” means the buyer will buy your shares at the agreed upon price with a set expiration date. The “call date” is the date the option expires. The call contract expires worthless to the buyer on the expiration date if the price is not equal to or greater than the price you set. Your shares will be called (sold) if the price is reached. You keep the profit from the sale of the covered call and any profit you would have received if you had sold the shares at the call price.
What is the catch? If a buyer buys your covered call at your price, you are unable to sell your shares until after the option expires. You promised them to someone. They are needed to satisfy the buyer of your option. This introduces some risk. For example, if someone agrees to buy your shares for $50, and the price of the shares plummets to $40, you cannot sell to escape your investment. As with all strategies, this one has risk. Therefore, I wouldn’t buy a high-risk, volatile investment and then write covered calls.
Also note that covered call options are not available for many thinly-traded stocks. If you buy some speculative investments, you might discover that there are no options being bought or sold for that investment.
Selling Calls for more than 100 shares.
You can sell one covered call for each 100 shares. So, for example, if I own 500 shares, I can sell 1, 2, 3, 4 or 5 options. If I am willing to sell all 500 shares, then I would enter a covered call transaction for “5”.
Now for the Video
This will take you to a video I recorded using Snagit and stored in a public Dropbox folder. This is my first attempt to create a tutorial video, so I know that it isn’t “professional” grade. However, I welcome comments and questions. VIDEO LINK: SELLING COVERED CALLS
Some wise investors will note that I should have held onto my original 200 shares of AMD. You can see the price I paid for those shares was well below the current price. Yes, it is painful to see that, but I had no idea that AMD would succeed as much as it did. Because my focus is on dividend growth investing, I prefer to treat AMD as a short term holding. That is one of the reasons I am comfortable doing covered calls on my current AMD holding.