Generating income with calls involves selling call options, also known as writing call options, to earn premium income. Here are the steps to follow:
- Choose a stock or ETF: First, choose a stock or ETF that you believe will stay relatively stable or rise in price in the near term. Look for stocks or ETFs that have a high implied volatility, which will translate to higher premiums for the options you sell.
- Select the strike price: Determine the strike price for the call option you want to sell. Choose a strike price that is above the current stock price if you think the stock will remain stable or rise slightly, or choose a higher strike price if you believe the stock will increase in price more significantly.
- Sell the call option: Sell the call option by writing a contract that obligates you to sell the underlying stock at the strike price. You will receive a premium for selling the option, which will be immediately credited to your account.
- Monitor the trade: As the expiration date approaches, monitor the trade to ensure the stock price remains below the strike price. If the stock price remains below the strike price, the option will expire worthless, and you will keep the premium income.
- Repeat the process: If the trade is successful, you can repeat the process with other stocks or ETFs to continue generating income.
It’s important to note that selling call options can be a risky strategy, as it involves unlimited potential losses if the stock price rises above the strike price. It’s important to have a solid understanding of options trading and risk management before attempting to generate income with calls.
Risks of Selling Calls
Selling call options, or engaging in covered call writing, can provide a steady income stream for investors, but it also involves certain risks, including:
- Opportunity cost risk: If the underlying stock price rises above the strike price, the investor may miss out on any further appreciation of the stock beyond the strike price.
- Limited profit potential: The premium earned by selling the call option is the maximum profit that can be made on the trade, regardless of how much the stock price increases.
- Unlimited potential loss: Selling call options without owning the underlying stock is a highly risky strategy as the potential losses can be unlimited if the stock price rises significantly.
- Market risk: The overall market conditions, including economic and political events, can affect the stock prices and call option premiums.
- Assignment risk: If the stock price rises above the strike price, the buyer of the call option may exercise their option, requiring the seller to sell their shares at the strike price.