FrugalJim

I’m probably going to pay some more “dues” for enrollment in the School of Stock Market for this, but I guess it’s part of the learning experience.

Today I sold my first covered call.  So what the hell does that mean?

I currently own 100 shares of General Motors.  Today it is priced at around $12.50, so my total investment is $1,250 (ps, I originally bought it for $10 per share).  And today I sold a call option for October 18th with a strike price of $15.00, and after commissions I made about $50.

A call option gives the owner the “right” to buy a certain stock for the strike price on the expiration date.  So in my case, I gave someone else the right to buy my shares of GM on October 18th for $15 each.  By doing so, I sold my right to any profits if the stock goes above $15 to whoever bought this option from me.

If, at the end of the month, the stock is below $15, the option expires and I get to keep the $50 (a 4% return on my investment in 1 month).

In essence, I’m making a bet that the stock won’t appreciate by 20%.  The only way I can lose money in this is if GM goes below $12.50 per share (which is very likely).  But considering I plan on holding this stock for at least the next year or so, I at least get a little cash from the options sale in the meantime.