Getting paid to sell stocks you want to sell…at the price you want to sell it at!
The key to profiting in the stock market is…buy low and sell high! Pretty easy right? LOL. In a previous article I shared how we can use options, specifically selling Put options, to get paid to buy stocks we want to buy, at the price we want to buy them at. In other words, buying stock at a discount.
Now, once you’ve bought “low”, perhaps at a demand zone, or support area, your goal is to sell “high”, for a profit when it rises to your target. Perhaps an opposing supply zone, or resistance area. Or frankly any area, or for any reason, someone wants to sell their shares.
Say you own shares of Nike (NKE), which closed today at $132.48…and you plan on selling your shares at $140/share. A trader, or investor, would simply place a GTC limit order to sell the shares at $140 a share. If the stock gets to $140, the limit order will get triggered, and the shares will be sold at $140. If the shares were bought for less than $140, a trader would realize a profit on the trade. However, If the stock doesn’t get to $140, the shares won’t be sold, and the order will stay a pending order until it either does get filled, or the trader cancels the order.
The question is, are you willing to sell your shares at $140? And if you are, why not get paid to sell your shares at $140? That’s not a trick question, if you’re willing to place an order to voluntarily sell your shares at $140, why not get paid a premium, to take on an obligation to sell your shares at $140?
Yes…you can literally get paid to sells stock at the price you want to sell it at!
When buying options, calls or puts, a trader is buying the “right” to buy or short shares in the future, at a set strike price, on or before a specific expiration date.
However, when selling options, a trader is collecting premium, and in exchange for collecting that premium, they are taking on an “obligation” to sell or buy shares at a specific strike price by a set expiration date.
If we wanted to sell shares of NKE at $140, we could simply sell a 140 Call option and collect a premium. In exchange for collecting that premium, we’ve now taken on an obligation to sell shares of NKE, which we already own, at $140/share. Which was the price we said we wanted to sell it the shares at anyway.
If the stock is at or above $140 the day the call option expires, we’ll have to fulfill our obligation to sell our shares at $140…however, we were paid a premium to sell the shares. The premium we collected, is profit, above and beyond the profit we made off the stock itself. We added to our profit both in terms of actual dollars and a higher RoR.
However, what if the stock doesn’t get to $140? The stock owner not only won’t have to sell their shares…they’ll get to keep the premium they collected when they sold the call. That’s right, they get to keep their stock AND keep the premium they collected because they were just willing to sell their shares. Is this a great country or what!
And if NKE doesn’t get to $140 by expiration, and we don’t have to sell our shares, what can we do? Sell another call option, and collect another premium, at another expiration date, further out in the future. How often can we do this? As long as we own the shares.
Of course, if the stock is above $140, and we have to sell our shares, we could of course buy the shares again the next week, and sell another call option, at a higher strike price, collecting another premium.
The example I just shared is generic, in that we’re sharing, in general, how covered calls are used. In reality, a trader needs to know what strike option to sell, and what expiration date to choose. In other words, they need a trade plan for the covered call, in addition to any original trade plan on the long stock purchase. Selling the wrong covered call could actually offset stock profits if done incorrectly.
However, when done properly, covered calls are an excellent way for stock owners to add cash flow, and RoR, to stock positions they are already own. While covered calls are a wonderful way to generate cash flow and premium, they are in addition to owning the actual shares. So, before you look to sell covered calls, make sure the underlying stock is a stock you want to own, preferably a stock that is trading sideways to slightly bullish.
You don’t want to be selling covered calls on a stock that is tanking!
As always, all trading involves risk, and there are no guarantees any trade will be profitable.