Covered Calls For Retirement Income - Part 1

Many fail to get involved in selling stockstackup.com" title="covered calls">covered calls because it deals with options, yet the technique is really fairly simple. The term "Covered" just means that you own the stock you are "writing" a call option on.

In short, this strategy involves buying a stock and then selling someone else the right to buy it from you in the future (an option). The fact that it is a "call" option means that they (the option investor) are hoping the price of the stock will go up (to remember this, you call UP someone, then you put DOWN the phone - so "calls" are UP or Long, and "puts" are DOWN or short).

How does it all work. Do you have to go out and find the buyers for your call options? NO. This is all done for you by the broker. Once you "write" (or sell) the covered call, one of three things can happen:

1) The price of the stock goes up in value, and the buyer exercises his right to buy. In this case, you've pocketed the premium, and you'll most likely be selling the shares at a profit too! You'll then have to find another stock to buy in order to continue the strategy.

2) The stock price remains about the same (it could go up slightly, and the call option would still not be worth executing). In this case, you keep the option premium. Since the buyer won't be willing to pay you less than the option value for the stock, you'll keep the stock, too. You've made about 4% over three months, and you can even sell the right to buy your stock again! Not bad right?

3) The stock falls in value. In this case, the option premium you received helps to offset the loss on the stock. The buyer walks away when the right expires, and you're also free to sell another option.

So if the investment goes up, then we sell it for a gain. If the investment stays the same, then we profit from the option. If the investment drops in value, then the option premium helps offset the loss.

I know that sounds like a can't lose strategy, but there are a couple downfalls you need to avoid that we will cover in Part 2 of this article series.

Doug West has worked in Financial Planning and Investment training for over 20 years. Get his No-Cost Audio Report on how you can Secure Your Retirement with Free-Online Tools:

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