You can take profit from stocks without selling them by using covered call writing. This strategy involves selling call options on the stocks you own, giving someone else the right to buy your shares at a specific price (the strike price) by a certain date (the expiration date).
Here's how it works:
- You own 100 shares of XYZ stock at $50 per share.
- You sell a covered call option with a strike price of $55 and an expiration date of three months.
- You receive a premium for selling the call option. This premium is your immediate profit.
- If the stock price stays below $55 by the expiration date, the call option expires worthless. You keep the premium and your shares.
- If the stock price goes above $55 by the expiration date, the buyer of the call option can exercise their right to buy your shares. You are obligated to sell your shares at the strike price of $55. You still receive the premium you earned from selling the call option.
Benefits of covered call writing:
- Generate income: You receive a premium for selling the call option, which is your profit.
- Limit downside risk: The maximum loss is limited to the difference between your purchase price and the strike price, minus the premium you received.
- Potential for upside profit: If the stock price remains below the strike price, you keep the premium and your shares.
Risks of covered call writing:
- Limited upside potential: Your profit is capped at the strike price.
- Loss of shares: If the stock price goes above the strike price, you are obligated to sell your shares.
- Potential for volatility: The value of the call option can fluctuate, which can affect the premium you receive.
Example:
You own 100 shares of XYZ stock at $50 per share. You sell a covered call option with a strike price of $55 and an expiration date of three months for a premium of $2 per share.
- If the stock price stays below $55 by the expiration date, you keep your shares and earn $200 in premium (100 shares x $2/share).
- If the stock price goes above $55 by the expiration date, the call option is exercised. You are obligated to sell your shares at $55 per share, earning a profit of $5 per share ($55 strike price - $50 purchase price) plus the $2 premium, for a total profit of $700 (100 shares x $7/share).
Important Note: Covered call writing is a complex strategy and should only be undertaken by experienced investors who understand the risks involved.
