PATHWAY TO PROFITS: Lesson #3
PATHWAY TO PROFITS: Lesson #3 Welcome to this, the next lesson. We’re going to start with a few definitions. Writing Covered Calls is a process of using assets to make money. It can be done part-time or full-time. It is a true workhorse, turning the stock market into a business, with business type income.
WRITING: The word writing in the stock market means to sell. You might here Selling a call, or writing a call. It means the same thing. Selling puts, or writing puts is also the same.
COVERED: Covered means you actually own the stock. We are going to write a call against stock we own. This process gives someone the right to buy our stock on or before a certain date, at a fixed price. By selling this call we are obligated to sell the stock, and if called upon to do so, we are covered—we own the stock and it is electronically transferred to the buyers account.
CALL: A call is a stock option giving someone the right, but not the obligation, to buy a stock at a certain price, on or before a date certain. The buyer of a call option puts his/her money at great risk. The stock has to move up, and move up quickly or he or she will lose all or part of their money. This risky business is not what we’re doing. We’re selling the option, pocketing the cash, and don’t really care if we get called out (sell) the stock or not.
WRITING COVERED CALLS: This is an “INCOME PRODUCING ASSETS” formula. Our sole purpose is to generate monthly income, sometimes two or three times a month. We buy good stocks and then sell the call to gather income from an outside party, a third source.
Before we enter any trade we can really measure whether the numbers work or not. We know the price of a stock. We can easily look up how much we can get for selling the option. We can look at charts and see where the stock has been. We can check the news and other information about the company. This process puts us in control of our financial destiny.
The only risk we have is the stock moving down, but once you learn about stop-losses, this risk is mitigated. In short, there are protective measures. I’ve purchased stocks at $10 and wrote the $10 and $11 calls for 80¢ to $1.20. The stock then dipped to $8. No, I didn’t like it, but I then wrote the $8 and $9 calls for 70¢ to 90¢. No, it wasn’t as much but it was still spectacular.
There’s more on this in PAID TO TRADE, The mega ten-lesson course.
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