Should I "Sell to Cover" stock options on which the market price is slightly below or above the current market price?

Asked by Jackie

1 Answer

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Answered by Dave Bradley, Investment Manager (Financial Advisor) in North Charleston, SC
Hi Jackie,

Wow, we love these type of questions. Are you selling a Put or a Call? I'm assuming you already own the underlying stock? Is this correct?

Covered Call:
As Rule #1 Investors, If we own this company, and we sell someone the right to buy our stock at a price higher than we think it’s worth, then we have almost no risk whatsoever. If the stock price goes up to that super high price, we want to sell it anyway. We want to sell into greed and we want to buy into fear.

If there is greed going on and the stock price is shooting up like a rocket, we want to be a seller of that stock. We can pick up cash flow, by putting out and selling call options, which basically gives someone the obligation to buy our stock at that higher price so that they buy it from us. They pay us a premium and we can put that money in our pocket.

If the stock price doesn't go up we get to keep our money. If the stock price does go up, then we sell the stock. Either way we win.

Covered Put:
These are great for reducing basis when stockpiling. If we get Put, then our basis is lowered and we purchase more stock. If we don't get Put, we collect the premium. There is no need to cover unless you don't want the stock. In that case, why did you buy the stock to begin with? Has the story changed? If so, consider selling the stock or do a BPS.

Here is a basic Youtube video by Phil town on options.

Feel free to contact us directly for more information on your specific situation. No obligation.

It's not what you make; it's what you keep that determines your lifestyle. | 05.24.16 @ 00:10
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