I’ve always loved the stock market, particularly when it pays me. Dividend stocks have been the bread and butter of my life. When I discovered I could bring in a little more money by learning to trade options, I was excited to give it a try.
An option is essentially insurance on the price of a stock. You can buy or sell an option to buy or sell a stock at a particular price for a length of time, the same as you would buy insurance for your car and have certain costs covered for the length of the policy.
I started recently with a covered call. It’s a simple trade, where you own 100 shares of a stock and for a premium you sell someone the ability to buy that stock from you at a certain price for a certain period of time . I sold the $77.5 call on a stock called Realty Income (ticker: O, and received a premium of about $45. This stock has a history of paying nice, consistently increasing dividends and paying every month, so I didn’t want to lose the stock. It was at $72 and I thought that a $5 move in 30 days was highly unlikely, maybe impossible.
The stock skyrocketed from $72 to over $82 (almost 14%), when it was finally bought away. I never saw a move like that coming, but if I had analyzed the past 52 weeks, I would have seen that this kind of move was actually fairly common. I learned, the hard way, that a lot of study, along with a plan for what to do next, is critical if I’m going to trade these.For more on the strategy of selling covered calls, try The Options Playbook, by Brian Overby.