Chris Rowe

4 Ways to Generate Instant Options Profits

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Ideally, you want to sell calls with a strike price that's slightly higher than the stock's current price. It's also OK to sell calls with a strike price that's at-the-money (i.e., the same as the stock's current price) or slightly in-the-money (i.e., slightly lower than the stock's price). The idea is to profit from the decaying time value of the option that you have sold.

Ideally, you also want to sell calls that will expire in 30-45 days, because that is when time value will decay most rapidly.

Like the Song Says, 'We're in the Money'

How can you make your money work (or work harder) for you while it's in your trading account? Here's a quick look at how easy it can be to make money with minimal effort.

Let's say you buy 1,000 shares of "Bob's Car Wash" (BOBC) at $50 per share.

The stock now trades to $58 per share.

You say to yourself, "I would be willing to sell my stock at $60. Let's see what the BOBC June 60 Call options are trading at," because you know that someone is willing to pay something for the right to buy your shares of BOBC at $60.

You find out that you can "sell to open" the BOBC June 60 Calls for $2.

Again, the stock is trading at $58, and so far you are up $8,000 on your stock position.

Remember these two keys:

* Each option contract represents 100 shares; 10 option contracts represent 1,000 shares. So, if you own 1,000 shares of BOBC, and you want to sell someone the right to buy your 1,000 shares of BOBC, then you would sell 10 call options (to open, to establish your short position in these call options), because 10 option contracts represents 1,000 shares.

* Some people get confused about selling first, and buying second. Traditionally, people are trained to understand only buying something first and selling it second. But when you write an option contract (or sell that option contract), then you are essentially "short" the option contract. You can first sell an option contract at $10 (to open), and THEN buy the option (to "cover" your short position) three weeks later at $6 (to close) for a 4-point profit ($10 - $6 = $4, or 4 points).

So, to review, BOBC has traded from $50 to $58 per share.

You sell 10 June 60 Call options ("sell to open"), and you receive an extra $2. (That's $2 per share. Remember, because there are 100 shares of the underlying stock represented in each option contract, multiply that number by 100. In this case, you would collect $200 for each contract that you sell to open.)

That part of the transaction is now done. Assuming you hold 1,000 shares of BOBC, you now have an extra $2,000 in the bank, no matter what happens to the stock. (That's $2 per share, times 100 shares in a contract = $200, times 10 contracts to cover your 1,000 shares, for a grand total premium collection of $2,000.)