Sell Covered Call options
for monthly for residual income
Give me a moment of your time and I'll I teach the same thing I teach creative and performing artists who seek financial freedom.
Selling
call options on stocks you buy is a fast and reliable way of
generating income on a monthly basis. It works like this:
Let’s say you bought a stock on Monday at $9.75. That stock is now in your possession and you now own it. If you wanted to sell it the next day you are free to do so. If you wanted to hold that same stock for three years you are free to do so. However, if you wanted to generate income from that $9.75 stock you are free to do so.
Fast forward to the next day, Tuesday, and you’ve decided you want to sell the stock you purchased on Monday when it reaches $10. Rather than selling the stock immediately, you could sell a call option.
Selling a call option means that you would be selling the right, not the obligation, to someone in the market place to buy that stock away from you at the $10 price at a later date. The buyer of the option would then pay you something called a premium. In this example our premium is $.90 per share. The price that you’ve agreed to sell the stock at is called the strike price. In this case it’s $10.
So in the above example you sold a call option and earned a $.90 per share premium. Simultaneously, you agreed to sell the stock at the $10
Strike Price
No matter what happens in this transaction, if the buyer decides to buy the stock from you or let the option expire, you get to keep the $.90 premium.
The buyer of the option could choose to exercise that option at any time before the expiration date and pay you the full $10. If the buyer decides to
exercise the option, you would be obligated to sell the stock to him or her at the $10 strike price but you would keep the $.90 premium.
Let’s look at the total profit
Stock bought at $9.75 sold at $10 = .25 per share profit or 2.5% return
Plus .90 premium. = .90 per share profit or 10%
Total profit on trade = 12.5% per month
WOW That's Great !
Entertainment Industry Option Equivalent
OK, If you really want to understand how stock market options work, we can take a look at the entertainment industry equivalent.
Let’s say you wrote a film script. You send your script to a well known Hollywood production company. Your script gets read by the top executive. She loves it. However, she’s not one hundred percent certain she can sell your script to a major motion picture studio for production. What’s her solution? An option.
The Hollywood production company is willing to option your script from you for $50,000. The option expires in six months. You still own the product and copyright. If your script gets picked up by a studio, you’ve agreed in advance to sell it to the production company for $250,000.
In the right option scenario, everybody wins.
In the above example, if your script gets selected by Warner Bros. for production, you earn an additional $250,000. Whether your script gets sold or not, you get to keep the initial $50,000.
If your script gets sold, your profit on the deal is $50,000 plus $250,000 for a total profit of $300,000. In the stock market this kind of transaction happens over one million times each day.
If you understand the entertainment industry option equivalent, you can earn thousands of dollars per month in residual income.
Stock Option Rules
1) The stock you purchase must be optionable.
2) You must buy stocks in one hundred share increments referred to on Wall Street as a contract.
3) You must enjoy earning large amounts of money on a monthly basis.
Cash Flow Example
If you practiced and sold calls on a monthly basis, you could generate a 10% monthly return or more. That means…….
$5,000 could return $ 500 per month less commission
$7,500 could generate $ 750 per month less commission
$10,000 could generate $1,000 per month minus broker commission
Taken to a higher level
$50,000 could return $5,000 per month
$100,000 could return $10,000 per month
$500,000 could return $50,000 per month
Options Explained
So what are options?
An option is a contract that
gives the buyer the right, but not the obligation, to buy or sell an
underlying asset at a specific price on or before a certain date. An
option, just like a stock or bond, is a security. It is also a binding
contract with strictly defined terms and properties.
Still confused? The idea behind an option is present in
many everyday situations. Say, for example, that you discover a house
that you'd love to purchase. Unfortunately, you won't have the cash to
buy it for another three months. You talk to the owner and negotiate a
deal that gives you an option to buy the house in three months for a
price of $200,000. The owner agrees, but for this option, you pay a
price of $3,000.
Now, consider two theoretical situations that might arise:
1. It's discovered that the house is actually the true birthplace of
Elvis! As a result, the market value of the house skyrockets to $1
million. Because the owner sold you the option, he is obligated to
sell you the house for $200,000. In the end, you stand to make a
profit of $797,000 ($1 million - $200,000 - $3,000).
2. While touring the house, you discover not only that the walls are
chock-full of asbestos, but also that the ghost of Henry VII haunts
the master bedroom; furthermore, a family of super-intelligent rats
have built a fortress in the basement. Though you originally thought
you had found the house of your dreams, you now consider it worthless.
On the upside, because you bought an option, you are under no
obligation to go through with the sale. Of course, you still lose the
$3,000 price of the option.
This example demonstrates two very important points. First, when you
buy an option, you have a right but not an obligation to do something.
You can always let the expiration date go by, at which point the
option becomes worthless. If this happens, you lose 100% of your
investment, which is the money you used to pay for the option. Second,
an option is merely a contract that deals with an underlying asset.
For this reason, options are called derivatives, which means an option
derives its value from something else. In our example, the
house is the underlying asset. Most of the time, the underlying asset
is a stock or an index.
Call & Put
Options
The two types of options are calls and puts:
A call gives the holder the right to buy an asset at a certain price
within a specific period of time. Calls are similar to having a long
position on a stock. Buyers of calls hope that the stock will increase
substantially before the option expires.
A put gives the holder the right to sell an asset at a certain price
within a specific period of time. Puts are very similar to having a
short position on a stock. Buyers of puts hope that the price of the
stock will fall before the option expires.
Participants in
the Options Market
There are four types of participants in options markets depending on
the position they take:
1. Buyers of calls
2. Sellers of calls
3. Buyers of puts
4. Sellers of puts
People who buy options are called holders and those who sell options
are called writers; furthermore, buyers are said to have long
positions, and sellers are said to have short positions.
Here is the important distinction between buyers and sellers:
-Call holders and put holders (buyers) are not obligated to buy or
sell. They have the choice to exercise their rights if they choose.
-Call writers and put writers (sellers), however, are obligated to buy
or sell. This means that a seller may be required to make good on a
promise to buy or sell.
If this seems confusing, don't worry. Your job is to learn how
to generate thousands of dollar per month in residual income as
a covered call option seller.
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