More Covered Call Option Income in Your Pocket

One last note on the call option example given on Wednesday… If you like the potential income of this strategy, but you really believe that there’s more upside in Intel than $23 and you don’t want to miss out on it, you can sell a higher priced Call Option.  The $24 Strike Price Option listed above makes it less likely to be called away.  If it is called away, you will earn an 11.78% return just on the capital gain of the stock.  This is in addition to the amount you would make by selling the Call which in this case is about $10.  Of course, because you increased the option price and made it less likely that the option would be exercised, the income you receive is much less.  $10 works out to only 0.47% or 2.79% annually if repeated 6 times (every two months).

Wednesday, we didn’t show the $22 Strike Price Option because it’s so close to the current price, but it currently pays $54 per option.

Today, Let’s look at an option which expires further out so you can see the difference in income to you…

Calls for Mar 19 2011

Last Change Bid Ask Volume Open Int Strike

0.37         -0.01          0.36 0.38 329           2,832             23

You can see that this option would pay you more because you’re giving the buyer of the option more time for the price of Intel to move.  This means more income for you upfront, but remember, you can only repeat an option that expires 3 months out 4 times per year.

If you like this concept, but don’t feel comfortable with the actual trading of options, you can buy a mutual fund or ETF which sells Covered Calls as part of their management.  This strategy can be fantastic in choppy markets.  It will not do as well as the overall market when the markets are steadily rising.

This is Post 11 of a new series on stock options which we’ll be revisiting every few days.  You can find the first few parts at the following links: Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7, Pt 8, Pt 9, & Pt 10.

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