Chris Rowe

4 Ways to Generate Instant Options Profits

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There are two fundamental reasons why we trade options: leverage and protection. (See also: Top 7 Reasons to Trade Options.) We want the big gains that options trading can provide, and we also use options trading strategies to preserve those hard-earned portfolio profits.

Even though we're all searching for those double- and triple-digit wins that options trading can provide (i.e., leverage), in a wild market like this where our profits can practically evaporate within the space of a few days or even a few hours, I want to focus a profit-protecting topic that many of you may already be familiar with: selling covered calls.

I know that talking about conservative strategies might cause some of you to turn away. But for those of you still with me, I can change your life even if you are very familiar with the strategy, because I can guarantee that you are probably under-utilizing this powerful trading tool.

Think about this for a second: If you can generate 2.5% on your investment by selling a covered call each month, that's a 30% annual return. And that's only when you calculate the income you'd get from selling covered calls -- assuming you don't make any money on the underlying stock position. But you have to consider that you might profit from your stock position, too!

To understand why you should make covered calls a regular part of your investment diet, ask yourself one question …

Why Do Gaming Establishments Make so Much Money?

That answer is simple, and it applies to your portfolio, too. It's because there are millions of people who are OK with taking bets, even when they know that the odds are against them.

Sure -- every now and again, the casino loses and the gambler wins. But does "the house" ever really lose? I mean, is the gaming establishment ever really gambling at all?

Nope -- the guests are doing all of the gambling. The casino is simply running a business. The house knows that, every now and again, it will have to pay up. But the amount that it pays out once in a while is dwarfed by the amount that it collects from most of the other guests. Everyone knows that!

But when you are the buyer of (i.e., buying to open) short-term, out-of-the-money options, you might not realize that you are the same guy as the gambling casino guest.

When you are the person who is selling (aka, writing, or selling to open) covered calls, you are the dealer!

You are the one who is accepting payment after payment after payment from the guy who wants to see his $2 call option trade up to $10.

Feel at Home Being 'the House'

Once you have sold a covered call against stock that you hold long in your trading account and received your payment, either you will keep the premium and your stock position, or you will keep your premium, and you will be "called" to sell your stock at the option's strike price. Big deal! Just be sure to sell covered calls only if you are willing to sell your stock at the strike (or "exercise") price.