Investing in options can be risky but selling covered call options is relatively safe. Suppose you own 2,700 shares of ABC stock. In early August, you sell an option to buy your shares at a $10 price, until mid-September.
ABC is trading around $8.70 that day. You receive 25 cents per share when you sell those options. Thus, you receive $675 (minus the trading expense) for a net gain of $598.
These options are worthless unless ABC reaches $10 per share before the expiration date: unless ABC appreciates 15 percent in the next six weeks, the option buyer has wasted his money. At 25 cents per share, you received over 2.5 percent of the current price of the stock for selling the options.
Now you have limited your upside potential to 17.5 percent in the next six weeks: 15 percent in possible stock-price appreciation plus 2.5 percent for selling the options. On the other hand, if ABC goes down 2.5 percent, you would still break even. Because stocks generally go up gradually, selling covered call options is a way to boost returns for a stock that you are willing to sell.