Covered Calls Lower Risk While Increasing Gains
Did you know that when you own shares of stock in a company, you can sell someone the option to buy that stock from you? It’s true. Thousands of stocks have available what are known as equity options. What many investors don’t realize, however, is that there are many people out there who want to pay you a significant premium to have the option to buy your stock from you at a set price. It’s known as writing covered calls.
Here is how it works:
Each trading day tens of thousands of option investors gamble on the direction a stock price will take. Instead of buying the stock itself, these people gain leverage of a stock by paying a fee which gives them the right to buy a stock at a set price. As that stock’s price moves up or down, the options that these investors control also move up or down in value — only at a much more dramatic rate. Option investors stand to make incredible returns if the stock performs before their options expire. Sometimes they do make a killing, and, as with gamblers, that allure of the “big score” keeps them buying options.
Ask yourself this question:
If we were deciding with whom to invest money, would it be smarter to invest it with the gambler or with the casino?
People who buy stock options are gambling with their money. People who sell stock options, however, are investing intelligently by taking a set, predictable return on investment in exchange for their stock’s short-term potential. When you sell someone a “call” option on stock that you own, you are selling that person a window of time in which he has the right to buy your stock at a set price. He is gambling that your stock is going to go up dramatically during the window of time that the option is active.
When you sell an option on your stock, you are writing a covered call.
By writing covered calls, you can lower your risk on your investment, you can greater predict how much money you will make, and you can dramatically increase your profits. Most importantly, selling other people the right to buy your stock gives you the ability to make consistent, compounding returns on your money.
The Key To Wealth Is In Compounding Returns
Money makes money. Wealthy people put their money in situations that cause it to compound. Their investments reach a critical mass whereupon a small percentage gain translates into an extremely large return. Average people, on the other hand, put their money and their time into things that do not easily compound their profits. They blindly follow the herd without ever really thinking about the nature of wealth. If you want to make more per month than what most people make in a year, the three main factors to consider are time, rate of return, and risk.
The law of exponential change states that a sum will expand itself at an exponential or accelerating rate if its return is multiplied by each subsequent unit of time. What that means is that you will make a vast amount of money over time if you can find a situation where your money can compound quickly.
Using the methods we teach, it is not uncommon to grow ten thousand dollars into thirty or forty thousand dollars in a year’s time. In fact, many people are averaging far more than a 15% rate of return per investment. The bottom line is this:
By putting your money to work for you intelligently, you can generate far more profit than you might have previously thought possible.
Your focus should be less on what could happen in the short-term, but rather on finding a way to create wealth that will build exponentially for the rest of your life.