Cover Me: Writing Covered Calls and Puts

If you're holding equities in your stock portfolio, it's likely that you're in a world of hurt right now. You can generate extra income -- and give yourself some insurance -- by selling covered calls and puts on the stock.

You can sell covered calls on your stock if you believe the price is going to rise or sell puts if you are feeling bearish. Let's look at a covered call example.

Suppose you sold options with a strike price equal to or greater than the price you paid for the equity. If the stock remains flat, declines in value or even increases a little, an at-the-money or out-of-the-money call will likely expire worthless and you'll keep the premium you received when you sold the calls. If that happens, you can sell another covered call in a subsequent month.

If the stock appreciates above the strike price by the option expiration date, your stock will likely be called away. This is not necessarily a bad thing. If you sold at-the-money or out-of-the-money calls, you will generally make a profit -- possibly one that could exceed the profit you would have made had you simply bought the stock outright.

Read more: Trading Options for Retirement