Options are most commonly used by investors for either leverage and / or insurance (hedging).
As leverage, options allow the investor to control an equity position without paying 100% of the share price.
For example, rather than going on the open market and purchasing 100 shares of IBM for $8,257 ($82.
57 per share), an investor could control the same amount of shares at a given strike price for a fraction of the cost such as the Jan 07 $80 strike with a total cost of$1,050.
As insurance / hedge, options can assist in protecting against price fluctuations.
For example, the same IBM investor can sell a call against his shares which will reduce the basis in the equity position by the premium received.
In other words, he has hedged his position against any short term fluctuations his equity position may experience.
Selling options provides many benefits with the major reason being collecting premium from the sale of such an option.
The premium collected goes into your account and can then be used to invest in other positions.
The writer keeps the premium regardless of whether or not the option is exercised.
Another important aspect with selling options is that of time value which now works for you rather than against you.
Selling options is not new and it isn't as complicated as many make it out to be.
It is a viable means of generating consistent income from your portfolio.
If you are not selling options against your positions you are losing out on money you could be putting in your pocket each and every month.
Keep in mind writing covered calls are not get rich quick strategies.
They are a means of generating income for the individual investor regardless of their trading expertise.