How to Generate Income Using Call Options

In an overvalued market, a covered call strategy can be a good way for investors to generate yield without taking a lot of risk in the market.

Mar 27, 2014 at 9:39PM

Stock markets are looking overvalued, and investors looking to squeeze some extra value from their stocks should consider a covered call option strategy. 

A covered call is just a share of stock that's covered by an option you've sold to someone else. If the option expires above the strike price, the other party exercises the option, and you get the strike price and the premium paid to you when you sold the option. 

The better news comes when shares end below the strike price, leaving the option worthless at expiration. You still get to keep the premium paid for the option, which is cash in your brokerage account. 

In the video below, Fool contributor Travis Hoium covers a few interesting stocks for covered calls, and three pointers investors should always keep in mind. 

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Travis Hoium manages an account that owns shares of Cisco Systems. The Motley Fool recommends Cisco Systems and Tesla Motors. The Motley Fool owns shares of Microsoft and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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