Welcome.
Here's where investing starts to become a lot more fun.
This is where you start to pad your account with 'extra' money.
When you own 100 shares of a stock, it is called a "round lot." 200 shares would be two round lots. 300 shares, three round lots.
Round lots are really the only amount that professional investors will take a position with.
There's a reason why that is.
Options.
Options are contracts that trade in the stock market just like regular stocks do. In fact, if you look at a share price on Google Finance or Yahoo Finance, you'll likely see a little note about the options.
Each option contract controls 100 shares of stock.
Well, here's a cool thing you can do.
You can apply for permission with your broker to trade options. This usually entails filling out a questionnaire and reading and understanding some risk disclosure notices. It's not a big deal.
If you've never traded an option contract before - that's fine. They'll generally start you out with the level of permission that we're covering right here - Selling Covered Calls.
They'll do that because it is the safest of all the option strategies.
Here's why they'll let a complete novice do this: with a Covered Call, it is hard to lose money.
Selling a Covered Call can be thought of like this:
If we own 100 shares of Intel, we can sell a Call against them that will give someone the option to buy them from us at a set price at some point in the future. We can choose what price we'd be willing to sell them for! We can choose what date we'd like that contract to expire on!
So, if we bought them at the current price of $29.90, just as you see in the picture above, we can agree to sell them at a set price (I suggest a higher price than what you bought them for) and with that option expiring on a certain date in the future.
So, if, based on the picture above, you spent $2,990 today (May 5, 2016) and bought 100 shares of Intel you could then sell one July $33 Call for about $0.21 per share!
Since, as we said early on, each contract covers 100 shares, that one contract sold would bring $21 into your investment account, immediately. You get to keep that $21 no matter what.
Now, up at the top of the table you see "View options by expiration" and then July 15, 2016 is selected in the drop-down box.
Each option contract expires on a certain date. Most of the time, those are at the end of the day on the third Friday of the month. In July 2016, that's the 15th. Sometimes there are contracts that expire on other Fridays, though, so pay attention to which you select.
The expiration date of the contract determines what will happen to the shares after the market closes on that date. Here's how it's figured out:
If, on July 15, 2016 Intel closes at $32.99, then nothing happens. You keep your shares and you, of course, keep the $21 you took in when you sold the contract. Basically nothing changes. On the next trading day you're free to sell another Call against those shares and bring in even more money.
If, on July 15, 2016 Intel closes at $33.00 or higher, then your shares get bought by someone else for $33 per share (this is referred to as having shares "called away"). $3,300 will show up in your account and the shares will disappear.
Since you paid $29.90 for them, then got $0.21 per share for selling the Call, your actual price for the shares would be $29.69.
If your shares were called away at $33 each, you made 11.14% for the two and a half months you owned those shares! Not bad at all! Many people would be happy to earn that kind of return in a whole year.
That's it, those are the only two outcomes.
Either you keep your shares and you're free to sell more Calls against them, bringing in more income upfront, or
your shares get called away and you sell them for a profit.
Easy-Peasy.
Now, of course you can't trade stocks through Google Finance or Yahoo Finance - you have to use your own broker.
Each broker has its own way of doing things, but in my experience, its pretty darned easy to do this. If you need help your first time, there are usually very helpful people at your broker's support center that you can reach out to for help. Once you do it a time or two, its easy.
I'll show you how it looks in Interactive Brokers. Other brokers will be similar.
You just select the Option tab - between Stock and Futures.
Select Sell from the drop-down box
Input the desired number of contracts to trade (remember one contract covers 100 shares!)
Input the ticker symbol (in this case its INTC for Intel).
Select which expiration date.
Select which price.
Select Call, since you're selling a Call.
Input your price - I suggest putting in about what the market is trading them for (within a penny or so)
Make sure the order type is a "Limit Order" - on Interactive Brokers that is "LMT".
Then you click the Preview Order button
Look everything over carefully to make sure its right...
then click Submit Order.
Done.
Relax.
