It is amazing to me that not many retail investors understand the concept of generating cash flow from their stock positions. When I tell people that I utilize covered calls to generate extra income, hedge my stock positions, and set strict sell disciplines they look at me like I am crazy. I was introduced to the concept from a stockbroker. The idea of writing covered calls is the only option strategy that you can employ at most of the major brokerage firms for your IRA investments. The reason is that writing covered calls is a very conservative strategy relative to other option strategies.

Covered call writing is usually easier than most people make it out to be. It works like this. I’ll give you $1,000 now, if you let me buy your stock five months from now at a set price. If I want to walk away from the deal, you get to keep my money.

Now I will go into more detail. Do not worry, just keep re-reading this until you get it. I buy 1,000 shares of FGH at $10 and the stock goes to $11 several weeks later. I can make money right now without selling my stock by selling the option to someone to buy the stock from me six months from now at $12.50. For that option, the buyer has agreed to give me $0.50 per share or $500 right now.

The $500 is deposited into my brokerage account immediately. My brokerage company will not allow me to sell my stock prior to 6 months unless I buy back the option on the open market. With big fluctuations in option prices, I usually hold my stock until the expiration date.

Six months from now, two things can happen. First, the stock can go above $12.50 and the buyer of the option “calls” me out of the position which I happily do since I bought the stock at $10. The second thing that can happen is that the stock falls below $12.50 and the option holder is holding on to a worthless option. No option holder is going to “call” you out of the stock if it is $12.50 when he can buy the stock in the open market for $11.50 a share.

You then start the process all over again by writing another call against your position.

Let’s examine what I accomplished with this strategy: 1. I hedged my position by 5% or $500 2. I set a strict sell price that I was willing to let the shares go for, $12.50 3. I generated income that I could enjoy or reinvest.

I can not tell you how happy this strategy has made me since the crash of 2000-2001. The strategy has helped me keep my head above water in this depressing market.

There are a variety of software programs available that will let you spot the best stocks to buy, then write covered calls against. Of course you do not need any software. The software just saves you some research time.

But remember, any option strategy involves more risk than just buying a stock so always consult with a licensed financial adviser first.

Do not buy any stock trading education materials until you see Lance Jepsen’s free stock market blog at how to invest in stock market, and learning the stock market