Selling a Call (Part 2 of Options as an Income Generator)

Last week, I wrote about options being exercised. Normally, if you do your analysis right, that should happen infrequently. But it could and does happen. And if it does, what can you do?

Let me recap my strategy: Earn income by selling PUTs OR own good stock at a good value.

So what happens when the options get exercised? You get to own good stocks at a good value. This is why it is important to do a proper company analysis in before we sell the PUT. It is equally important that you already have the funds in place in case your PUT options get exercised!

Once you have the stock on hand, you can turn it into an advantage: Selling the CALL.

A call option is an agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time period. (Courtesy of Investopedia).

Again, my example of KMI:

  1. PUT option which was exercised on 22 Feb 2016. I got the KMI shares.
  2. Sold a $18 CALL @ .42 due 26 Feb 2016.
  3. Option expired, I sold another a $18.5 CALL @ .60 due 18 March 2016.
  4. On the expiration date, this option was exercised.

On the sale, I made $0.715/share. Including the $0.42 and $0.60 that was made on the options, a total of $1.735/share. Worked out to 9.76% of the initial investment. Not too shabby for one month.

Of course one could argue that if I had kept those shares and sold them later, I could have made more as KMI did go higher than $19 at some point. But that is speculation and I prefer to deal with some margin of safety. Also doing this allows me to make my options trades per week or month and not have to worry too much on the whims of Mr. Market.

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