So, you’ve probably seen me trading for a while now on my YouTube channel. (Maybe you’ve even been following every single trade I do, in real time, and trading with me.) If so, then there’s no doubt that you’ve seen me making “covered calls” sometimes. I’ve tried a little bit to explain how these covered calls work, during some of my live streams, but with so much else going on during these streams, I apologize if my explanations there haven’t always been completely clear. That’s why I’m writing this blog post, right now, while I’m not streaming live – hopefully, this explanation will make more sense. In short: There are additional ways to get your money working for you.
I think the best way to explain it is for me to just give you a hypothetical example: Let’s say I bought stock in Company X six months ago for $20 per share. Well hey, it’s gone pretty well, and had a moderate increase, so it’s now at $30 – great, that’s a 33% profit so far. But now I’m concerned, and I think it’s going to slow down and stay in that $30 region for now.
Well, I don’t want to close out the position, since I don’t think it’s going to go down, either. But I do want to figure out another way to make money from that stock, if possible. And, believe it or not, this is possible, with a covered call. So, I go ahead and look at these call options. And, as it turns out, I can sell a $35 call option contract.
So then, a buyer decides to pay me a fee for this contract, maybe it’s $1.00 per share. And now, this new buyer can purchase this stock from me for $35 per share at the pre-determined expiration date, if he wants to. And if he does want to, then – by me selling this type of contract – I’ve agreed in advance that I will have to sell at $35 per share, even if this stock is more valuable than $35 at that time.
Well, turns the buyer was right, and I was a little bit wrong: Company X has actually gone up to $40 per share now on the expiration date, and that buyer, of course, is going to exercise his option to purchase it from me at $35, so that he can then sell it back to the market at the current $40 value. He’s just made $5 profit (less the $1.00 fee he paid me), and everyone’s a winner.
It really just comes down to thinking outside the box. Active traders, who are always thinking, and considering every opportunity, are often the ones who will become the serious money makers. So, with this in mind, be sure to keep covered calls on your menu of trading choices.