What’s the downside is a very obvious question, especially when it seems on the surface that this stock investing strategy so straight forward and so stacked in our favour. Well there are a couple of things to consider. Firstly, since you own the stock there is always the chance that the stock price will fall. If this happens you of course get to keep the fee paid to you but you have a paper loss on the stock.

Now in reality if you are happy to own a stock then you’ll always have the risk the stock will fall in price. Remember though that we are dealing with good stocks and history will show that stock prices on average will rise in price over time; albeit with price dips along the way.

In fact have you noticed what happens each time you receive your fee from this stock investing strategy. You actually reduce the cost of your shares so that employing this stock investing strategy continually REDUCES YOUR RISK compared to simply buying and holding the shares.

In our example, our stock would actually have to fall to $19.50 before we lost any money. That’s $20.00, the price we paid for the stock, less 50 cents the first fee we received. So it’s a risk reducing stock investing strategy.

The second thing to consider is that if the stock price does rise substantially, and it might on some occasions, our profit is limited to our agreed price. In our example our profit on the stock is limited to $1.00. That’s $21.00 the price we have agreed to sell at, less $20.00 the price we bought the shares for. However as we have already said it is much better to be the one that receives the small regular cash each month than to be the one HOPING for a big rise in price. In other words better to be the seller of hope that being the one hoping.

CONTINUED…

1. Why would anyone pay me to buy my shares at a higher price than I paid for them?

2. How do I find someone to enter into an agreement like this?

3. How do we agree on the sell price, the fee and the date?

4. What’s the catch?

5. The Technical Stuff

Disclaimer: This information is provided for educational purposes only.

Well once again you don’t have to do much here because the sell price, the agreed date and the fee are all pre-determined for you with this stock investing strategy. You just need to go through the list (I’ll show you where to find this in a minute) and choose the one you like. Then you call your broker and say which one you want and they’ll execute the agreement. Your fee (the money the other party pays you for the right to buy your shares) gets paid into your account virtually immediately. And as we said before you get to keep this fee regardless.

Are you beginning to see the simplicity of this stock investing strategy? And are you beginning to see how effective this stock investing strategy can be at making you extra monthly cash? Depending on how many shares you currently own or how much cash you have you could easily be making an extra $3,000 per month. Well let’s complete the picture…

CONTINUED…

1. Why would anyone pay me to buy my shares at a higher price than I paid for them?

2. How do I find someone to enter into an agreement like this?

3. How do we agree on the sell price, the fee and the date?

4. What’s the catch?

5. The Technical Stuff

Disclaimer: This information is provided for educational purposes only.

People enter into agreements to buy shares at a future date like this all the time. Why? Because the person who pays you for your promise believes that the price of the shares is going to increase before the end of next month. If the current stock price is say, $21.00, they might think the price will rise to $22.00 by the end of next month.

If this happens then the person who paid you will be able to buy your shares for $21.00 and sell them for $22.00, making a $1.00 profit. If we subtract 50 cents for the rent they paid you, then that’s a net profit of 50 cents. They only put up 50 cents (the fee they paid you) so if they are right and the shares do go up to $22.00, then they have made a 100% return on their money in a little more than a month.

Now look at what’s happened to you in this stock investing agreement. You bought shares at $20.00 and received a 50 cent fee when you sold the right for someone to buy your shares at $21.00. If the shares don’t reach $21.00 by the end of next month, then you get to keep the fee paid to you, plus you get to keep your shares. How good is that?

Now if the stock price rises to $22.00, you will have to sell your shares for $21.00 making a $1.00 profit. PLUS you get to keep the fee paid (you keep this fee regardless of what happens). So you will have made a total profit of $1.50. That’s a 7.5% profit for you in a little over a month.

So you can see that in this agreement both parties win. The difference is that the person paying the fee for the right to buy your shares is taking a bet that the stock price will rise. You on the other hand are happy to take their money, just like a lottery company takes money from people, because you know that no matter what happens you win. And do you know what you do the following month with this stock investing strategy? Yep that’s right, you do the same thing again.

Now be aware that if your stock rises to say $30.00 you’ll need to sell your stock for the pre-agreed price of $21.00.

But what generally happens when stock rise sharply like this? That’s right they tend to fall again. So you can miss out on some upside but in return you are getting cash flow.

If you want to test what return you’d get if you did write covered calls versus if you didn’t, you could take a look at this Stock Market Simulator. It lets you test and practice without risking your money. Click here… Paper-Trader

Generally they don’t rise so sharply and even if they do rise it’ll usually end up not much higher than the $21.00 in our example. So you’ll usually get to keep most of the profits. If the stock price does rise and you really don’t want to sell you shares, I’ll show you how you can “buy back” your agreement.

CONTINUED…

1. Why would anyone pay me to buy my shares at a higher price than I paid for them?

2. How do I find someone to enter into an agreement like this?

3. How do we agree on the sell price, the fee and the date?

4. What’s the catch?

5. The Technical Stuff

Check out the answers by clicking on each question. If you have a specific question, ask it at our New Stock Market Forum. Be the first to ask a question.

Disclaimer: This information is provided for educational purposes only.

When you buy stocks at a discount, two things happen. First you effectively make an instant profit because you could immediately turn around and sell your stock at the market price. And second you lower your risk because the stock price needs to fall further before you’re in the red.

Click on the video below to learn more…

Resources:

1. To learn about Technical Analysis

2. To open a Trading Account. Note, only use an online Broker such as this if you’re totally comfortable with the strategy. If not you should use a Full Service Broker, at least to get started.

3. To practice this strategy using a Stock Market Simulator