OK, I'll give a real life example. That might be the the easiest way to do explain it. BTW, all I do as far as options are concerned is sell covered calls and occasionally buy them back.
Firstly, before you can sell a "covered call", you have to own the stock that you are selling calls on.
OK, let's go to my example, the numbers are not exactly right, but close.
Last December, I bought SUNW for about $38.00
I then sold a Jan 40 call for about $1.00
This gives the purchaser of the call, the right to buy from me SUNW at the price of $40, before the option expires, which in this case was the third Friday of January.
As it happened, SUNW was well over 40 by the third Friday of January, so I was "forced" to sell at 40. However, I effectively only paid $37 for the shares I bought ( $38 minus the dollar I got back for my call).
I sold at $40, so I made $3 a share. Of course, if I hadn't sold the call, I could have sold my SUNW for about $44 and made $6 per share, but I never worry about missed profits, I'm just glad to make some.
Anyway, OTOH, if SUNW had closed at $39, then I would still have had my SUNW and my basis price would be $37 instead of $38. Then I could have turned around and sold another covered call for Feb or later expiration date. I just started using them recently and have found them to be a useful tool. When my stocks get called away, I just look at it as I'm being forced to sell for a profit, which isn't all bad. If they don't get called, then I've generated extra income which I wouldn't have had. Of course, if you get upset about missed profits, covered calls might not be for you, but I find they help me to be more disciplined about my buying and selling points.
Hope this helps. |
