How can I use options to generate income on stocks I own?

by Dawn Pennington   06/25/08
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Q: How can I use options to generate income on stocks I own?

A: The way to get this extra return is by selling call options against the stocks, indexes or Exchange-Traded Funds (ETF) that you hold long in your trading account. This is also known as a "covered call" strategy, when you own the underlying instrument and short, or write, options against it.

When you write, or "sell to open," one of these contracts, you give someone the right (but not the obligation) to buy shares from you at a set price for a specific period of time.

Provided you're comfortable with all possible outcomes, including selling your stock to an option buyer (that is, a person who went long the option you shorted, should they choose to "assign" you to provide stock shares), you can get extra return from a trade you were willing to make anyway.

If your short option doesn't get exercised or assigned, you keep your stock and the amount you were paid for writing the option, which is called the premium.

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