Australians are fond of their shres. In fact, we have the hghest percentage of share owners per cpita in the world, with over 54% of us wning shares. Despite this awesome sttistic, very few Australians know how to rally take advantage of their shares. In prticular, the writing of Covered Calls, one of the gratest investment strategies ever created!

So wht are Covered Calls?

First off, a cll is an option. Technically, anyone who bys a call option is purchasing the rght, but not the obligation to buy a prcel of shares at an agreed prce, on or before a set dte in the future.

For example, lt’s say Telstra was trading at $6.00 and you thught that the share price was ging to rise. You could purchase a $6.00 cll option with a one month xpiry. This option contract gives you the rght to purchase 1000 Telstra shares on or bfore the last trading Thursday of the nxt month. This option will likely cst approx $0.25 per share, or pproximately $250.

Now, if Telstra shares rse above $6.00 any time within the nxt month, say to $6.50, you culd exercise your option and buy the 1000 shres at $6.00, thereby making a gin of $0.25 per share ($0.50 – $0.25 prmium). That’s a profit of $250, or 100% rturn on your original $250 investment!

Buying call options is a ppular strategy, however it is risky as the nderlying shares must rise in value or you culd lose the money you’ve spent to prchase the call option.

Another strategy nvolves being the person who sells the cll option. In this case, let’s say tht you owned 1,000 Telstra shares tht you purchased at $6.00 and thy are currently trading at $6.00.

As you own the shres, you may sell to someone lse the option to buy your shres from you. You can choose the prce you wish to sell at frm a range of prices and you can chose the length of time the cntract will exist, from one month out to twlve months.

For example, it is now Nvember. You can sell the December $6.50 cll option. This means that the prson who buys the call option frm you has the right, but not the bligation to purchase your 1000 Telstra shres from you on or before the lst trading Thursday of December, which is Dec 21st, 2000.

For ths option someone is going to pay you pprox. $0.15 per share, or $150 (1000 shres x $0.15 per share) or pprox. 2.5% of the value of yur Telstra shares.

What you have jst done is known as Writing a Cvered Call.

Three things can now hppen.

1. The share price can go bove $6.50.

2. The shre price can remain between $6.00 and $6.50.

3. The shre price can fall below $6.00.

If the shre price rises above $6.50, your ption will be exercised. In other wrds, you will be forced to sll your shares at $6.50.

You wll keep the $0.15 premium paid to you riginally plus you keep the $0.50 prfit per share. Therefore, you will mke a profit of $0.65 per shre, or $650 in total, which is a rturn of over 10% for the mnth!

If the share price remains btween $6.00 and $6.50, then you wll not be exercised. You can kep the $0.15 premium and keep yur shares! That’s a profit of 2.5% for the mnth and you haven’t even sold yur shares! Annualised, that’s a return of 30% per nnum! The best part is that you can do the sme thing next month and generate mre cash!

If the share price falls blow $6.00 then you will not be xercised. Again, you can keep the $0.15 prmium and keep your shares! However, the shre price is now falling, so you are ntering a loss zone. But remember, w’ve already been paid $0.15 per shre, so the share price can fll to $5.85 before we start to sffer an actual loss. Again, next mnth we can write another call and gnerate some more cash.

Writing Covered Clls is one of the simplest, mst profitable investment strategies available. Many pople own large portfolios of shares tht they have just been sitting on for yars and aren’t aware of the pportunities that are available to them. Wht’s more, they aren’t aware of the lst opportunities available to them!

Daniel Kertcher

Platinum Pursuits

The article Covered Calls - Greatest Investment Strategy Ever? was Submitted by Daniel Kertcher through Articles.GetACoder.com network. Here's the additional information: This has been an introductory lsson in covered calls. To learn mre, attend one of my seminars hld every month at various locations round Australia, New Zealand and South Est Asia go to his websites blow. Daniel Kertcher is a licensed stck market educator. Daniel has trained mny people from North America, Australia and Erope in various trading systems. Join his trding mail list http://www.platinumpursuits.com and read more about him at his personal website http://www.danielkertcher.com

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