What can you do to collect income while waiting for a stock to go down in value? What if stock XYZ is currently trading a $50.00 and you are willing to buy at $49.00? To collect option premium, an investor would sell a put option contract. When you sell a put option contract, you are obligation to BUY 100 shares of XYZ at $49.00 (the strike price) on or before expiration. So if the price of the stock stays above $49.00 on or at expiration, the put seller gets to keep the option premium and the option expires worthless. If the value of XYZ falls below $49.00 on or at expiration, the option may be exercised by the option buyer and the option seller is assigned 100 shares of stock at $49.00.
On April 19, I wrote a covered called on my 100 shares of Royal Bank for a premium of $59.05 after commissions. The expiration date is June 17 , 2016 with a strike price of $80.00. I wrote a covered call on 100 shares on TD Bank stock on April 19 for a premium of $59.05 after commissions. For the covered call on TD Bank stock, the expiration date is May 20 with a strike price of $56.00.
On April 22, a sold a put option contract in Telus Corporation. The strike price is $40.00 with a May 20 expiration date. I collected a premium of $84.05 after commissions.
I collected $202.05 in option premiums on the 3 trades. If the put option is assigned in T.TO, I might write a covered call or just keep the shares. For the covered calls are not assigned, I will look to write covered calls if the option premium is sufficient.
Please note: Selling options is risky and you have to have permission from your broker in order to sell them. Selling a call without owning the underlying shares, is referred to ask writing a naked call. You have to have permission from the broker to be able to do this, as there shares would have to be bought on assignment at the market price and then immediately sold at the strike price if option is assigned.
Disclosure: Long RY.TO, TD.TO
DISCLAIMERI am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.
Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.