Volatile markets leads to great opportunities to make money, and lose money, in the options world.
In this video, we’ll introduce you to the simplest, and safest, option strategy; Selling covered calls.
Selling a call means you’re granting the buyer of the call the ability to CALL your shares from you at a certain, pre-agreed upon price.
This pre-agreed upon price is call the STRIKE PRICE.
If the share price goes ABOVE the strike price before the option expires, the person who bought the option COULD make money.
For instance, Walmart currently trades at say $95. I sell an option to someone to take my shares at $100 between now and June 2019.
The person who BUYS that option, i.e., that right to take my shares, pays me $400.
If the share price of WMT says below $100 between now and June, when the option contract expires, I made an extra $400 and still have my shares .
If the stock prices goes above $100, the person who bought my option could make money, and a lot of money depending on what the price ultimately trades at.
Say WMT goes to $150. Well, the buyer of the option has the right to call my shares from me but only pay me $100. Thus he is going to make the difference between the purchase price, $100, PLUS what he paid for the option $4, and what he could sell the shares for, $150.
So, he risked all of $4 for the POTENTIAL to have a HUGE gain. But many, if not the vast majority, of option contracts expire worthless, meaning the buyer loses out
But all it takes is a couple big hits and the buyer makes out like a bandit, indeed.
For me, the option seller, my upside is limited. My downside has been cushioned as well due to the fact that I was able to get an extra $4 per share by selling the option.
Is this a good strategy? Way too hard to say. But it’s something for you to know nonetheless.