Put Your Stocks Under Contract For Instant Income
The U.S. housing market has been hot this year thanks to low mortgage rates. This has been great news for sellers who put their homes under contract at premium prices. Did you know that you can make a similar transaction, putting your stocks under contract at a premium price?
Best of all, this special “under contract” agreement can pay you instant income anytime the market is open.
How to Put Your Stocks Under Contract For Instant Income Today
One of my favorite ways to generate extra income for my family is to put my stocks under contract by selling call options.
A call option is simply an agreement between two investors.
The investor who buys a call contract has the right to buy shares of stock at a certain price. The one who sells this contract has an obligation to sell shares at that same price. That’s how the agreement works.
The investor who buys this call contract actually pays to enter the agreement. On the other side of the table, the investor who sells the call contract receives that payment.
Now you don’t have to actually own a call contract to sell one. I know that sounds crazy, but hear me out…
By “selling” a contract, you’re simply entering the other side of this call contract agreement. in other words, you’re agreeing to sell your shares of stock (or putting your shares under contract) at a certain price, IF the investor who buys this contract decides to buy them from you.
Call Contracts Give You a World of Options
One of the reasons I like putting my stocks under contract is the myriad of options available. For every stock you might own, there are typically dozens of different call contracts that you could sell. In other words, there are different standardized ways you could enter these agreements.
The first thing to know is that each call contract represents 100 shares. So if you sell one call contract, you’re agreeing to sell 100 shares of stock to the other investor.
Next, you should know that there are different “expiration dates.” These are the dates when your agreement expires. Traditionally, call contracts expire on the third Friday of each month. There are also contracts for many stocks that expire on a weekly basis.
In addition to having multiple expiration dates, call options have different strike prices. The strike price is the “contract price” for your shares of stock. If you sell a call contract with a $45 strike price, the owner of that call contract can buy your shares for $45. This can happen anytime before the contract expires.
Finally, there is a market price for the call contracts you sell. The price is quoted on a “per share” basis, but remember each contract represents 100 shares.
So if you sell a one-month call contract with a $45 strike, for a price of $1.50 per share, you’ll get $150 for selling the contract. The owner of the contract will have the right to buy shares from you for $45 any time before the one-month contract expires.
This is a great way to generate extra income from the stocks in your investment account. You can even use them in an actively managed 401k account.
Here’s What Can Happen…
When you sell a call contract for shares in your account, one of two things can happen.
The first scenario is when your stock closes above the strike price when the call contract expires. When this happens, the owner of the call contract will typically “exercise” his right to buy your shares. Your shares will automatically be sold to him.
While there are a few exceptions, the majority of the time, the owner of the call contract will only exercise this right when the call contract expires.
Remember, you have an obligation to sell your shares to him at the strike price. You were paid to enter that agreement. So you should only sell call contracts with a strike price that lets you sell your shares at a price you are happy with.
The second scenario is when the stock closes below your strike price. If this happens, the owner of the call contract will not want to buy your shares at the strike price. You’ll get to keep your shares and the call contract will expire.
Of course you’ll always get to keep the income you received from putting your stocks under contract. That’s why this strategy is so good for generating income.
Have you used this “covered call” strategy in your account? If so, were you happy with the results? What did you like about the process? What parts were unclear? Are there any questions you have that I could use as the basis for another post on this strategy?