Chris Rowe

4 Ways to Generate Instant Options Profits

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3. BOBC doesn't trade up or down, but sideways.

GREAT!

As time passes, the call option that you sold (to open) is losing its time value. Since you are "short" the call option, this is a good thing for you. Basically, as time goes by with the stock trading flat, you are making money as the call option loses value due to time decay.

If the stock pretty much trades flat until the option expires, even though that stock did absolutely nothing, you pocketed an extra $2,000! Even though the stock never got to $60 per share, you still made $10,000, as you had originally hoped for. (You made $8,000 on the stock plus $2,000 on the call option that you sold.)

Meanwhile, there is someone out there who was in the same position as you, but since they didn't sell covered calls, they are sitting on a $58 stock, wondering whether or not it will trade to their target price of $60, so that they can make the $10,000 that you just made with zero movement in the stock.

The call option expires worthless, you now have two choices:

a) You could either sell BOBC at $58 and skip down the street thinking about how cool you are for making $10,000 on a stock that only traded up 8 points.

b) Or you could sell another call (to open) that expires the following month or two out. Maybe you can sell the July 60 Call (to open), or the August 60 Call (to open) and collect even more "extra" premium.

4. BOBC trades somewhere between $58 and $59.99.

Again, GREAT! I can't wait to brag!

Let's say, for example, the option expires worthless, and BOBC is trading at $59 at the time. This means that you made $2,000 by selling the call option (i.e., you had sold that casino guest the right to buy your BOBC at $60) and you are also up 9 points on the stock. You are now up $11,000, and the stock never even hit your price target of $60!

The Moral of the Story

When you are long the option contract (said differently: when you are the owner/buyer of the option contract), time decay is your worst enemy because, as time passes, your option loses value.

When you are "short" the covered option contract (said differently: when you are the writer/seller of the covered option contract), time decay is your best friend because, as time passes, the option that you sold (to open) to someone else, loses value.

You can either buy the option back (to close) cheaper, which will result in a profitable option trade (offsetting your stock's loss of value), or you can let the option expire … which will also result in a profitable trade.

If this covered call lesson has helped you learn something new, then you are probably eager to get out there and write some covered calls on stock that you own, and start grabbing all of that extra money that you have been leaving on the table each month.

But, before you do, first consider this last possible outcome …

A Long Shot on a Short Call

What would happen, and how do you think you would feel, if you wrote a covered call on BOBC, which obligates you to sell BOBC at $60 per share, but two weeks later BOBC traded up to $90 per share? Hmm.

Before you read any further, think about that for a minute.

Do you know what would have to happen in that case?

Well, here it is:

You would have to sell BOBC to someone at $60, even though it is selling at $90 in the open market. Now, that might drive you crazy, even though your original plan was to sell at $60 anyway.

Ask yourself, how much heartbreak would it cause you, if you sold someone the promise that they could buy your stock at $60, only to see it trade up to $90 two weeks later?

Answer: You should feel like a loser much as the casino feels like one when someone puts $2 in a slot machine and wins $30.

Sure, this isn't an ideal situation. But remember, the reason why a casino is happy to give up a profit every once in a while is because it makes so much more in the long run.

I hope that I have given you a clearer picture of why options can be used as a way to gamble, but also as a conservative way to reduce risk.

 This market is packed with opportunities to make big money … if you know where to look. Find the hidden money-doublers in today's stock market. Learn more in your FREE Options Report.