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Covered Call
writing strategy using my ESPP (employee share purchase program) account from my employer.
I've always traded stocks since the internet stock bubble in the late 1990's. Back then I felt like I was the last one to finally start trading stocks. Even one of the major money magazines of the time called people "stupid" for not investing in the stock market. I invested twelve thousand dollars which quickly turned into 24,000. I doubled my money investing in anything that was going up. And that was pretty much every stock shot up like a rocket.
Everything I touched turned to gold (as the story goes)... I put my money in companies that would be the next big thing. I made $500 with each transaction. I would buy a company that was developing a new high speed internet called DSL. I invested in companies that were even going bankrupt. Back then when a company would announce it was going into bankruptcy, investors would rush to buy the shares, thinking the stock would be bought out at a higher share price. The price of the shares would skyrocket with everyone buying. It didn't make sense but rarely a herd mentality does.
Back then it would only take a small news story to run a stock price through the roof.
I was buying and holding for only a few days before my interests and my money would find another stock to focus on. Stockpickers were a herd and everyone was into buying. It seemed every stock had a 45 degree incline on the share price. All a person would need to do was buy, hold for a few days, then sell at a profit. It truly was THAT easy. Back then!
Those magazine articles telling everyone they were "stupid" for not investing in the stock market were right but for only six months. Soon after that the bubble burst and all of us "stupid" people felt really stupid for giving it a try. The money I had invested felt as if it was my Golden Goose laying the golden eggs.
In the early 2000's all of the folks who saw how easy it was to make money in the stock market, saw how easy it was to lose all our money in the stock market. I saw my money that I doubled cut in half and then cut into another half, then another half of that vanished away in a few days.
Most people would have given up, cancelled their trading accounts and cashed in what was left of the golden goose. I was not defeated so easily. I had seen that profits could be made, I had tasted the sweetness of success and wanted more. I knew it would be made so easily anymore.
Times had changed and success in the stock market had to be earned and were no longer guaranteed. It was a new game. A new game with rules, limits, and game plans.
This wasn't a sitting around waiting for an egg, it was hardball, the major leagues. I was a player in a serious game of profit and success and everything i touch would be gone if I didn't know what I was doing. I need to learn some new rules.
I looked around for ideals on how to play the game of winning at the stock market game by placing trades that were less risky. I wondered how people made money without risking losing it all. I wanted to know how to stop swinging for home runs each time. Could I just get to first place.
I found that trading stock options had less risk (if done correctly) than buying and holding stocks. I learned that it required less money than stocks. And at the time, I didn't have much money.
Since I didn't have much money, I couldn't just buy 100 shares of XYZ for $50/each. That would be $5000 that I didn't have.
I started looking around at what money I DID have. I had a ESPP (employee stock purchase program) at my office that I contributed $100 each month. I had 200 shares of stock in the account. I found that I could write covered calls against those shares. But first I had to get permission from the brokerage.
I applied for a options trading authority (level one) and was given access to write covered callson the shares I owned in my Employee Stock Purchase Program.
Four steps to using your ESPP (company stock) to write covered calls.
1. Apply for access, usually called a "level one options" account.
2. Get a strategy. Figure out what to do and how to do it....this is the big one.
3. Do it. Write the covered calls and let them expire worthless (collect the option price) or have your shares sold off and collect the option price.
4. Repeat steps 2 (adjust if necessary) then step 3.
Step one: Get access. If your shares are not held in a brokerage account that can easily be accessed online, then you can request to move your shares to a brokerage firm (without selling them) that is online and can handle options trading.
My shares were held in a fidelity.com account. All I needed to do was fill out a form and request an options trading access. Once you have the ability to trade covered calls and you have at least 100 shares to write options on, you're ready to start.
Step two: Get a strategy. This is the hardest step because it requires you to first learn what covered call writing is and also you need to have a plan or strategy for making money off of the shares you already have in your ESPP account. Covered call writing is very safe. The scary part is not understanding what will happen if your shares get sold or what will happen if your covered calls expire worthless. It all sounds so un-appealing so far.
One simple strategy is to wait for a spike in the share price, then sell a few covered calls (depending how many shares you have and how many you are willing to risk). At the peak of the spike, you write a covered call (one for every 100 shares you want to put at risk) and wait for the share price to relax down. At that point you can exit your covered call or you can wait until the expiration date for the transaction to end. That sounds easy, doesn't it? We will go over that last scenario many times in the next few paragraphs. There are new words for you to learn first before we start. And the whole concept of what you are doing needs to be explained.
Step three: Do it... Doing it means making the transaction. Sell a covered call on shares you already own at a price you think is higher than the share price will be in 30 day. Either buy your covered call option back at a lower price before expiration or let the options expire in 30 days.
Step four: Repeat step three each 30 days or whenever you close the option by either buying it back or letting it expire. Once you buy the option back you deal is closed. Remember you sell first then buy back later. The goal is to sell once the share price is at a high price which it will most likely not return to. For example, a news report was just released that says the company you have shares in just released a new product that will blow all the competitors away. However you know this is not all true and the truth will soon come out and drive the stock price down. Well, while the stock price is at it's high peak, thats the best time to sell covered calls. When the share price drops back down, you've collected the option price, and since the share price didn't continue to rise, your share will stay with you.
So to recap:
First you buy at least 100 shares of a company that has options
available. If the share are in your ESPP account, lookup the share name in a financial website like Yahoo or Google Finance. Enter your stock symbol into the website and check the details of your stock. It should have a link to the options available.
Most large corporations have options associated with their stock symbols. So type in your stock symbol. For example I'll use XYZ as my stock symbol. I work for the Xylophone Yellowstone Zebra corporation. Each month they take $100 out of my check and every six months they buy for me a few shares of their company stock which stock symbol is XYZ. The XYZ stock price is currently $50 for each share.
I own 200 of these shares which is worth 200x50=$10,000. I plan on keeping these shares for a long time. I don't want to sell for any particular reason right now but I would like to know if it's possible to make a hundred dollars a month extra on these shares that I already own.
Let's talk about "what if's"... What if something goes wrong and my shares get sold? Well it's just like setting a price to sell your car or sell your used cell phone. You set the price you are willing to let the shares get sold. If XYZ is at $50 today and it doesn't look like it will go any higher anytime soon, I might be willing to let someone bet me that if it gets up to $55 then I'll sell the 200 shares and if it doesn't I keep the bet money.
Think about that for a minute. A bet between me and you. Imagine you own 200 shares of XYZ. And I'm betting you $100, if XYZ goes up to $55, I'll buy them from you at $55 (200x55= $11,000). If it doesn't, then you get to keep my $100 and your 200 XYZ shares. What if you could do this bet every month. What if you never sold your shares and keep winning the bet. Winning the bet is you keeping the $100 and you keep your shares. Losing the bet means you sell your shares at $55 or $11,000.
Let's get started.
Covered Call
writing strategy using my ESPP (employee share purchase program) account from my employer.I've always traded stocks since the internet stock bubble in the late 1990's. Back then I felt like I was the last one to finally start trading stocks. Even one of the major money magazines of the time called people "stupid" for not investing in the stock market. I invested twelve thousand dollars which quickly turned into 24,000. I doubled my money investing in anything that was going up. And that was pretty much every stock shot up like a rocket.
Everything I touched turned to gold (as the story goes)... I put my money in companies that would be the next big thing. I made $500 with each transaction. I would buy a company that was developing a new high speed internet called DSL. I invested in companies that were even going bankrupt. Back then when a company would announce it was going into bankruptcy, investors would rush to buy the shares, thinking the stock would be bought out at a higher share price. The price of the shares would skyrocket with everyone buying. It didn't make sense but rarely a herd mentality does.
Back then it would only take a small news story to run a stock price through the roof.
I was buying and holding for only a few days before my interests and my money would find another stock to focus on. Stockpickers were a herd and everyone was into buying. It seemed every stock had a 45 degree incline on the share price. All a person would need to do was buy, hold for a few days, then sell at a profit. It truly was THAT easy. Back then!
Those magazine articles telling everyone they were "stupid" for not investing in the stock market were right but for only six months. Soon after that the bubble burst and all of us "stupid" people felt really stupid for giving it a try. The money I had invested felt as if it was my Golden Goose laying the golden eggs.
In the early 2000's all of the folks who saw how easy it was to make money in the stock market, saw how easy it was to lose all our money in the stock market. I saw my money that I doubled cut in half and then cut into another half, then another half of that vanished away in a few days.
Most people would have given up, cancelled their trading accounts and cashed in what was left of the golden goose. I was not defeated so easily. I had seen that profits could be made, I had tasted the sweetness of success and wanted more. I knew it would be made so easily anymore.
Times had changed and success in the stock market had to be earned and were no longer guaranteed. It was a new game. A new game with rules, limits, and game plans.
This wasn't a sitting around waiting for an egg, it was hardball, the major leagues. I was a player in a serious game of profit and success and everything i touch would be gone if I didn't know what I was doing. I need to learn some new rules.
I looked around for ideals on how to play the game of winning at the stock market game by placing trades that were less risky. I wondered how people made money without risking losing it all. I wanted to know how to stop swinging for home runs each time. Could I just get to first place.
I found that trading stock options had less risk (if done correctly) than buying and holding stocks. I learned that it required less money than stocks. And at the time, I didn't have much money.
Since I didn't have much money, I couldn't just buy 100 shares of XYZ for $50/each. That would be $5000 that I didn't have.
I started looking around at what money I DID have. I had a ESPP (employee stock purchase program) at my office that I contributed $100 each month. I had 200 shares of stock in the account. I found that I could write covered calls against those shares. But first I had to get permission from the brokerage.
I applied for a options trading authority (level one) and was given access to write covered calls
on the shares I owned in my Employee Stock Purchase Program. Four steps to using your ESPP (company stock) to write covered calls.
1. Apply for access, usually called a "level one options" account.
2. Get a strategy. Figure out what to do and how to do it....this is the big one.
3. Do it. Write the covered calls and let them expire worthless (collect the option price) or have your shares sold off and collect the option price.
4. Repeat steps 2 (adjust if necessary) then step 3.
Step one: Get access. If your shares are not held in a brokerage account that can easily be accessed online, then you can request to move your shares to a brokerage firm (without selling them) that is online and can handle options trading.
My shares were held in a fidelity.com account. All I needed to do was fill out a form and request an options trading access. Once you have the ability to trade covered calls and you have at least 100 shares to write options on, you're ready to start.
Step two: Get a strategy. This is the hardest step because it requires you to first learn what covered call writing is and also you need to have a plan or strategy for making money off of the shares you already have in your ESPP account. Covered call writing is very safe. The scary part is not understanding what will happen if your shares get sold or what will happen if your covered calls expire worthless. It all sounds so un-appealing so far.
One simple strategy is to wait for a spike in the share price, then sell a few covered calls (depending how many shares you have and how many you are willing to risk). At the peak of the spike, you write a covered call (one for every 100 shares you want to put at risk) and wait for the share price to relax down. At that point you can exit your covered call or you can wait until the expiration date for the transaction to end. That sounds easy, doesn't it? We will go over that last scenario many times in the next few paragraphs. There are new words for you to learn first before we start. And the whole concept of what you are doing needs to be explained.
Step three: Do it... Doing it means making the transaction. Sell a covered call on shares you already own at a price you think is higher than the share price will be in 30 day. Either buy your covered call option back at a lower price before expiration or let the options expire in 30 days.
Step four: Repeat step three each 30 days or whenever you close the option by either buying it back or letting it expire. Once you buy the option back you deal is closed. Remember you sell first then buy back later. The goal is to sell once the share price is at a high price which it will most likely not return to. For example, a news report was just released that says the company you have shares in just released a new product that will blow all the competitors away. However you know this is not all true and the truth will soon come out and drive the stock price down. Well, while the stock price is at it's high peak, thats the best time to sell covered calls. When the share price drops back down, you've collected the option price, and since the share price didn't continue to rise, your share will stay with you.
So to recap:
First you buy at least 100 shares of a company that has options
available. If the share are in your ESPP account, lookup the share name in a financial website like Yahoo or Google Finance. Enter your stock symbol into the website and check the details of your stock. It should have a link to the options available. Most large corporations have options associated with their stock symbols. So type in your stock symbol. For example I'll use XYZ as my stock symbol. I work for the Xylophone Yellowstone Zebra corporation. Each month they take $100 out of my check and every six months they buy for me a few shares of their company stock which stock symbol is XYZ. The XYZ stock price is currently $50 for each share.
I own 200 of these shares which is worth 200x50=$10,000. I plan on keeping these shares for a long time. I don't want to sell for any particular reason right now but I would like to know if it's possible to make a hundred dollars a month extra on these shares that I already own.
Let's talk about "what if's"... What if something goes wrong and my shares get sold? Well it's just like setting a price to sell your car or sell your used cell phone. You set the price you are willing to let the shares get sold. If XYZ is at $50 today and it doesn't look like it will go any higher anytime soon, I might be willing to let someone bet me that if it gets up to $55 then I'll sell the 200 shares and if it doesn't I keep the bet money.
Think about that for a minute. A bet between me and you. Imagine you own 200 shares of XYZ. And I'm betting you $100, if XYZ goes up to $55, I'll buy them from you at $55 (200x55= $11,000). If it doesn't, then you get to keep my $100 and your 200 XYZ shares. What if you could do this bet every month. What if you never sold your shares and keep winning the bet. Winning the bet is you keeping the $100 and you keep your shares. Losing the bet means you sell your shares at $55 or $11,000.
Let's get started.
If you're ready to get started, then you’re ready to start making some money with shares you already own. You have your ESPP Employee Stock Purchase Program shares in an online brokerage account, like E*TRADE or Fidelity. You should have at least 100 shares since stock options are base on one option controls 100 shares. So you will be selling one covered call for each 100 shares you own. And now you are ready to learn about covered calls
.
. Ok, let's get started. First you need to learn the key ingredients to making money with shares in your ESPP account. You need to learn about stock option trading. Option trading is a derivative to the normal stock market. Everyone knows about "buy low and sell high"... When you buy a stock, you want to buy at the lowest price and sell at the highest price. The difference between those prices gives you a profit.
"Buy low and sell high" is a simple concept that most everyone is aware of. You might also be aware of the derivatives market. It's like the back side of the stock market. We see the folks on the floor of a major stock market all wanting to "buy low and sell high" but what we may not realize is that there are many traders who can profit from stocks that don't move much in price, or maybe don't always rise.
Imagine a betting parlor where people are betting on which horse is going to win first. If you bet on the winning horse, then you win the most. What if there was a side bet that let you pick the winning time, not the winning horse. It doesn’t matter which horse would win as long as you guessed the correct winning time it took a horse to win the race. That would be a derivative of the main bet.
Stock options are derivatives of the main "buy and hold" stock trading. You are betting on what the price will be at a set date. Just like the gamblers betting on the winning time and not the winning horse. You are betting that you can predict what the price of the stock will be at a date in the future.
