Use Options For Income And Protection
Selling call options against stocks you already own (called "covered calls") is a time honored strategy used by investors to generate income as well as create some downside protection for their portfolio. The strategy works best in a sideways moving market but it can also work well in a slightly down or slightly up trending market.
A "call option" is a security that gives the buyer the right to buy 100 shares of a stock at a known price ("strike price") on or before a certain date ("expiration date"). Options are priced in $/share but because each controls 100 shares you have to multiply the quoted price by 100 to get the contract price. For example, a call option that is quoted at $1.50 really trades at $150 per contract. If you owned 100 shares you could sell 1 contract (call option) against those shares.
In exchange for putting a cap on your upside you gain some downside protection. For example, Let's say you own 100 shares of XYZ stock at $46. You'd be willing to take $50 for those shares in the next 2 months. You could sell 1 call option with a strike price of $50. Maybe you get $3 for the option ($300 since it controls 100 shares). So, you receive $300 today in exchange for giving the option buyer the right to buy your stock for $50/share any time in the next 2 months. If XYZ stays below $50 then the option expires worthless, you keep the $300, and now you can sell another option.
Now, $300 may not seem like much but this was only $4,600 worth of stock (100 shares of a $46 stock). So you got a 6.5% yield in 2 months. Imagine doing that every couple of months...that's 39%/year. And that is certainly better than any dividend or bond yield you will find.Continued on the next page