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Covered Calls: The Hidden Wall Street Strategy Every Investor Can Use

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Each day, billions of dollars are exchanged on Wall Street. Some of these trades are made by financial institutions like Citibank and Wells Fargo while others are made by insurance companies like AIG and Mass Mutual. One of the techniques used by Wall Street insiders to generate guaranteed income for institutional funds is selling, or "writing," covered calls. This simple technique is well known to the institutional trader, yet it remains a hidden Wall Street secret to the self-directed investor even though it is lucrative and even considered "easy" by Wall Street standards. In other words, you don't need to be a sophisticated Wall Street insider to master covered call writing.

Most investors need more monthly residual income from their stock market portfolios. Rather than investing in Mutual Funds or buying and holding stocks hoping for an increase in value, why not dedicate a portion of your trading account to covered call writing every month? The truth is that any investor with an online trading account can earn guaranteed income each month selling covered call options. However, in order to do this, acquiring the right education is vital.
Here's how trading covered call options works.

If an investor owns 1000 shares of Disney stock at $55 per share and is willing to sell those shares for a profit, that investor can sell the right to a second party to purchase their shares at $56 dollars per share. In Wall Street terms, the investor would be selling the right, but not the obligation, to a second party to buy their Disney shares at the $56 strike price. The income from selling the rights is referred to as the premium. The premium for selling a thirty-day call option could be as much as one dollar per share.

So what's the down side of selling covered call options? If Disney shares should rise to $61, in the above example the investor would be obligated to sell their shares at $56. However, if Disney shares never cross $56 by the option expiration date, the investor gets to keep both the shares plus the premium income. The key is knowing which stocks to hold for selling covered calls and which to invest in for the long term.

For decades, covered call option selling has been a well-kept Wall Street secret used largely by savvy Hedge Fund managers. Today, no matter what your background, the online trading software in most brokerage accounts has made it possible for the retail investor to profit right along with the big boys- all you need is a financial education to be on your way!

Content concerning financial matters, trading or investments is for informational purposes only and should not be relied upon in making financial, trading or investment decisions.