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Stock options, the first kick off

As I said, I am not experienced in [tag]stock options[/tag] at all. I have never traded it, but I really want to. As many books or literature say [tag]options[/tag] can be a great [tag]source of income[/tag], among other [tag]strategies[/tag]. There are many option strategies, maybe hundreds or thousands of them. I am looking for only one: a [tag]strategy[/tag] which can provide me with a sustainable income, which I plan to reinvest back either into [tag]stock options[/tag] or [tag]stocks[/tag] themselves.

Let’s start with the simplest [tag]strategy[/tag] “[tag]Covered call[/tag].” Professionals say it is the easiest strategy ever, suitable for beginners and good for the income [tag]investments[/tag]. The cons are that you have to own the stock you want to trade its options prior any [tag]trading[/tag]. This mean that in the market like this I won’t be able to trade these options because I do not own any stocks and I do not want to own them. It is a [tag]bullish strategy[/tag] and the market is not bullish, so I cannot expect stock being bullish too. However this strategy should be protecting you no matter what.
So here are scenarios which may occur:

1) If the [tag]stock price[/tag] rises at or above the [tag]strike price[/tag], the option will be exercised and I will benefit from [tag]premium[/tag] received plus gains from shares sold.

2) If the stock price remains at the same price range level below the strike price, the option will expire worthless but I keep the premium.

3) If the stock plummets (drops below my stop loss), I will liquidate the positions and I lose some [tag]money[/tag] on the stock holding sold. I do not get this part fully yet, but I will work on it as the time goes. In this case I am required to buy the covered call back and sell the stock to offset the loss the most easiest way.

This strategy would work with some cheaper stocks, because an [tag]investor[/tag] is required to own the stocks prior writing the [tag]call contract[/tag]. It is cheaper to buy, if you do not hold those stock yet, cheaper stocks instead because you would need to buy minimum 100 shares of a stock to write a call.

I decided to trade [tag]AFAM[/tag]. I am familiar with the stock a bit so I can expect some behavior. By selecting this stock I am expecting the stock to rise in price. If it won’t rise, the option will expire worthless and I should get my premium only, and I would be able to write another call contract next month. If the price rises at the strike price I’ll get a profit from premium and shares sold. If the stock will go against me, I will buy the call contract and sell shares to offset a loss. I will write about it more in my next posts. To be honest I need to get into this a bit more.

Here is my trade (be aware that this is a virtual trade for training purposes and I am not investing any real money in this trade):

  • I buy 100 shares of AFAM on Monday at expected range (bid/ask) 44.41/45.60, total expected trade $4,441 – $4,560
  • I sell to open [STO] 1 contract of .KQAAJ (AFAM January 2009, 50 strike, call) at the range (bid/ask) 1.85/2.65

Well, let’s see what will happen next week. This should be an income position and it should generate a stable decent income every month. If it does, I will employ a real money. On Monday I will inform you how this trade was executed and on weekly basis you would be able to see how it is doing, whether it is generating an [tag]income[/tag] as expected or not.


If you want to know, how my stock option trades are doing, click hereHello Suckers Feedto get regular updates.

Links:

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7 responses to “Stock options, the first kick off”

  1. Hogan says:

    Great stuff on investing!

  2. Suzi says:

    I have no idea how to invest into options, can anyone help?

  3. Investing Site says:

    I really liked your blog! I will be linking back to you.

  4. Cherri Fritz says:

    Thank you for this information it was a big help!

  5. Great post, thanks for the info

  6. Kevin says:

    Great Blog, but can’t seem to figure out how to subscribe to your RSS feed, can you help? Thanks. :)

  7. I REALLY liked your post and blog! It took me a little bit to find your site…but I book marked it. Would you mind if I but a link back to my site at whiterabbitcult.com?

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