Selling in the money covered calls

One way to lower the risk of buying an undervalued stock is to simply sell an in the money covered call on it.

Let's look at this, when you sell a call on a stock you own you get to collect money from the call. In exchange you are obligated to sell a stock for that price, if it reaches that price or higher by a certain time frame.

When you sell an in the money call on your stock you are actually selling a call with a strike price lower than the price of the stock you own. For instance you own a stock trading at $35 and sell the call with a strike price of $30.

Why would you do this? Because the premiums are often much higher as well. That $30 call might be giving you $6 or $7 for a 1 month out call. If you buy a stock for $35 and sell it for $30, but got paid $6 you still pocket a $1 or a 2.8% gain in 1 month.

There's many advantages of selling an in the money covered call.

1. High profit potential. Selling an in the money covered call can give you 2,3 or even 4% a month off of your investments if the stock stays up, Not many people dream of getting that kind of return.

2. Lowered risk. When you sell a stock for $35 it is as if you bought the stock for less. Think about it, you paid $35 but got paid $6. In which case it is like you bought the stock for $29.

Now there are some risks with this strategy, like everything else you have to pick stocks that are stable. If you buy a stock that goes bankrupt the small amount of money you collected for premium will not help you very much.

Besides this risk, you have 1 other risk whenever you sell covered calls on a stock; you are risking your potential profits. If the stock shoots up to $42, oh well. You still have to either sell it at $35 or buy the call that you sold back at a much higher price.

All this considered selling covered calls can be a great way to provide income especially when the markets are acting like they are today.