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Covered calls explained

By Jakob Jelling
Cashbazar.com

This is a good way to make money on your long-term investments.

Covered calls are a way that you can make money off of stock that you already own without selling it. This is a good idea if you have stock that you want to generate profit from, but that you think you should hold onto for the long term. In this case, you would write a covered call to generate money due to the premiums and still own the stock - unless the price of the stock went much higher than the premiums in which case you might end up selling the stock, but it would at least be for a price higher than the premium you agreed to.

What you are selling in this case is not the stock itself, but the ability to buy stock from you at a certain date depending on what the stock prices end up looking like. The best time to do this is if you think that the stock prices will stay the same or go down in the near future. Then you should offer a call option for that stock that is at a slightly higher price than what it would currently trade at. By doing this, you are setting the premium. If you are correct, and the stock goes down in price, then you will get to keep the premium, but you will not have to sell the stock at that lower price.

In this way, you are generating premium on the stock that you already own without selling it. This means that you will still have the stock to sell in the long term after you have finished generating premiums with it. In this way, you can get your long-term investments to work for you, instead of just waiting for a good time to sell.

One thing that you should consider before you start writing covered calls is that there is a little bit of luck involved in how high the shares go, and that you will need to make sure that you are going to earn enough premium from each covered call to make the time it takes to write a contract worth it. Once you've started writing contracts for covered calls, however, it will not be too hard to turn your long-term investments into profit generators.

About the author
Jakob Jelling is the founder of http://www.cashbazar.com. Visit his website for the latest on personal finance, debt elimination, budgeting, credit cards and real estate.

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