Selling Calls On Long Term Stocks



Posted: Saturday, May 17, 2008

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http://www.stocks-simplified.com

Selling calls on long term stocks can produce great income. The strategy works great for stocks that you are long term bullish on.

When you sell a call on a stock you already own you are making a covered call. You would get the premium of the call option. In exchange you will have to sell the stock at the calls strike price if that price is met or exceeded.

In other words you are limiting your potential gain from the stock for some quick cash. This is why if you like a stock for the long run you may only want to sell calls with a strike price that will probably not get you called out of your stock.

The best time to sell a call in this case would be when your stock is pulling back. If your stock pulls back down at resistance or breaks support then you could decide to sell a call above those lines. The money you make on the call option could help you feel better about staying in the stock during a pull back.

The worst time to sell a call if you are long term geared would be during extremely bulls markets. If your stock is making huge gains, then you do not want to be selling calls. This would limit your gain to the upside.

If you do end up selling a call on a stock you own and the stock moves up past the strike price of the call then you have two options. You can choose to do nothing. In this case you will have to sell the stock at the strike price of the option.

That may not always be a bad thing. If you were in the stock for a couple years then that price might be far more then you originally paid for it. You may decide you can find better investments out there and would be happy selling this stock.

If you still like this stock and want to hold onto it you can choose to buy the call option back. Because the stock went up your call option would be more expensive then what you sold it for. In this case you would lose a little on the option in order to keep your stock.

In general, selling calls will produce a great gain on stocks that you are holding. Unlike dividends which might pay off 4-5% in a year covered calls can pay off 4-5% in a month.

For more information on how make covered calls visit http://www.stocks-simplified.com/covered_calls.html

For more information on how to trade in the stock market visit http://www.stocks-simplified.com

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