A RIG Covered Call
I'm going to put a trade on an investment here. It is a covered call. This is a system for creating a host of Income Producing Assets.
This is a two step process. One, buy a stock; two, sell call—against the stock—giving someone the right to buy your stock at a set price, on or before a date certain. Covered means you actually own the stock, and have it to deliver to someone if they choose to exercise their option.
Here's a real example. These prices are as of a few minutes ago. Sometimes they change rapidly. But you can check them anytime. In fact, before you enter the trade, you can check the numbers and see if it's an appropriate trade for you.
The stock is RIG, or Transocean—an oil drilling concern. It's a billion dollar company with a lot of activity.
It's going for $8.97. May we just round off to $9 to keep the math easy. Let's do 1,000 shares, spending $9,000. Now, you must know if your broker will put up half of that money—or
$4,500. You put up the other half.
They lend you the money and the interest they charge is peanuts compared to the profits you'll receive. But it is debt so be careful.
You check the next month out call options. Usually people buy call options, securing the right, but not the obligation, to buy a stock at a set price. Not us. Not this time.
We're selling the options, generating cash into our account—in one day. By selling the options, we're giving someone the right to buy our stock at the strike price. Two things: 1. They will only do so if the stock is above the strike price. 2. Whether they do so or not, we get to keep they money they spent.
In short, we treat it like rental stock. It's an asset producing income for us.
Okay, we have $9,000 or $4,500 tied up. What would you like to make on your money? What would you get in the bank?
The $9 call options out a little over a month are going for 60¢ x 61¢. The first number is the bid. We sell at the number (market) or choose a price.
We have 1,000 shares. Option contracts are in 100 share batches. We can sell 10 contracts. I like easy math, so I speed the process and just take 1,000 shares times 60¢ and get $600.
I'll pause and let that sink in. Pause. Pause. Someone (the market) is willing to give you $600, locking down the right to buy your stock for $9. You like that.
Again, $600 is yours whether they buy the stock or not. Another thing: You take in cash. So, in affect, you have sold away the upside of the stock—during this time. If the stock runs up top $10d, you do not participate. You got paid well, agreeing to deliver this stock at a set price.
So, $4,500 made you $600. All of this money is in your account when this is over—he $4,500 (or $9,000) and the $600.
And we're off to another deal—maybe this one again.
LAST POINT: Some people see this and see only the numbers. Others see this and see their retirement.