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Finding An Income-Based Conservative Investment Strategy

February 09, 2012 | Comments: 0 | Views: 115

No matter where you look today there are stories of financial doom, gloom and despondency, people are sick and tired of the media talking about 'toxic loans', failed get rich quick schemes and much more. No longer are individual small investors in it for the 'fast buck', most appear to be seeking investment strategies that will enable them to have an income rather than a short-term capital gain.

Do such schemes exist? And if so where can you find them?

They do and are easy to find if you know where to look! Known as a 'covered call strategy' they are based on the principle that, today, most small investors are not 'gamblers', rather they want savings to accumulate some interest and not to be at the whim of some speculator's pocket book. People are looking for conservative investment schemes that offer a reasonable return on investments - and have easily understood risks and the rewards.

However, there are a some elements that have to be in place prior to setting out on this income-based route - you will need to have; a brokerage or a retirement account that allows you to write calls, enough stocks (greater than 100 shares each) or the ability to buy them in a range of companies and the ability to access a service (probably web-based) that will enable you to monitor your portfolio and to select the way you trade.

This strategy of covered calls is one that is clearly focused on income rather than capital gain. It depends on you using stocks that you already own and then to look at an option to sell them for a price that you can fix at some point in the future often called 'buy-write' - because you have previously bought the stocks and are willing to write an option for some one to buy at some point in the future.

It may seem a tad confusing but let's look at an example; you own shares in the XYZ Corporation, let's say 100 at $100 and you think, based on what you know of their performance, that their price will rise to, say, $105 in three or four weeks and you would like to benefit from that. Call your broker tell them to sell a three/four week option at a price of $105 (its called the 'strike price'). What will happen is that the broker will tell you what each share is trading for as a call option and deposit that amount for each share you own in your account. If it is $1 a share then you would get around $100 and if, over the period the 'strike price' reaches $105, whoever purchased the option will get them and you will get $10500 and that, added to the original £100 means that you have made an income of $600.

Suppose the strike price isn't met then you get to keep your shares and also the $100 allowing you to re-offer them at a later date.

Bob Wilcox is an active investor and jeweler. When not designing pearl jewelry he sells call options against stock he owns for monthly income.

Source: EzineArticles
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