Blog of Parag

It has been one year since I started dabbling in options as a strategy to boost investment income. I sold out-of-the-money covered calls for many stocks that I hold. There are three possible outcomes when these contracts reached expiration:

1. Stock price stays below the strike price of the call option and the contract expires worthless. For most of my options, this was the case. I got to keep the premium I received with no change in stock positions.
2. On two options, the stock price was above strike price. I didn’t want to sell the stock, hence I bought back the options. As the buying was done close to expiration, there was no time premium left and even on those trades ended up with small profits.
3. On two options, the stock price was above strike price on expiration and they got assigned. I sold the stock and started buying them back in following weeks. After I had to sell those shares, the whole market had a correction and my buying back price was lower than my selling price. Profit was made in these trades, too.

Even if one plays options very conservatively (which I did), they don’t always yield profits. There is an improved chance of making profits versus a loss. In my case, I was just lucky that all trades turned out profitable. The biggest chunk of money was made from expiration of worthless options. One can look at this strategy as if getting an extra dividend payment for holding the stock. The only problem is that money made from option trading is taxed as regular income and not as dividends which are taxed at lower rate.

Anyway, I made more than enough money through these trades to support my yearly wine consumption. Hope to keep this streak going in 2010.

Possibly Related Posts:

• Covered calls
• TIPS
• Stash that cash
• Passive income
• Galapagos Islands

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