Has your broker discussed the income earning potential of utilizing Call options?

In a nutshell, a Call Option is the opportunity to purchase a stock at a certain price on a set date.

Here is an example to consider which could lead to a discussion with your broker.

You own 1,000 shares of Pacific Rubiales.  The shares are trading now $21.50.  You can sell an option for someone to buy these shares from you up to January 14, 2014 at $25.00 per share.  The “right” to buy them is a called an Option.  At today’s price the Option purchaser would pay you .90 per share.  As calls are sold in block of 100 shares, you would sell 10 calls if you were prepared to sell out your entire position.  The transaction would provide you immediately with $900, less your broker’s commission.

If the stock reaches $25, the purchaser would exercise the option, and you would receive $25,000 for your shares and keep the proceeds from the option.  If the stock doesn’t hit $25, the option will expire without value and you will also keep the proceeds.

There are a number of risks that you need to consider: the stock could continue to climb above $25 and you will be giving up significant gain, the stock price could plummet and you decide to sell the stock, and then the prices climbs again but you no longer have the stock to “cover” the option.

Keep in mind that if the stock pays dividends, then you continue to receive the dividends until the option is exercised.

There are a number of simple strategies available to reduce your risk.  Every owner of equities should learn the basics of Options and then determine if it is right for them. returns.

The internet is full of educational material on Option Trading, or pick up a copy of Trading Options for Dummies.

 

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