When you buy stock shares, you expect them to increase in value. You understand there is a possibility the stock may go down, but you are confident you have made a good investment choice. During a period when the stock isn't moving up or down, other strategies are necessary to put some profits into your account.
If your stock pays regular dividends, you will earn some return from the dividend payments. If you expect an extended period of price stability or don't like the lack of growth in your portfolio in flat markets, consider selling any nondividend-paying stocks and replacing them with stocks that pay dividends. This approach would not be appropriate if you want to keep your stocks as long-term investments.
Selling Call Options
Selling call options against your stock positions produces more income for your portfolio. Writing covered calls, as this strategy is called, works especially well when share prices are stable or increasing slowly. When you sell a call option, you receive the price of the option and the buyer has the right to buy the share from you at a preset price. You select an option with an exercise price above the share price, so if the call-option buyer calls away your stock, you receive the higher price. If the share price stays flat, you keep the money from selling the option.
Selling call options against your stock could produce 10 percent or more in additional annual return in a flat stock market. Let's assume your stock currently sells for $30.50. A call option with an exercise price of $31 expiring in two months is priced at $0.90. One option contract is for 100 shares, so you would receive $90 for each option you sell. The $90 is about 3 percent of the $3,050 value of 100 shares. If your stock is below $31 after the two months, you keep the $90 and sell more call options against your shares.
Managing Your Sold Options
If your stock price does move above the exercise price -- called the strike price -- of your sold options, you have two choices. You can let your stock be called away, making a small profit and keeping the option premium, or you can buy back the now-more expensive call options and keep your shares, which are also now worth more money. Which way to go depends on whether you want to keep the stock you own or get the money from the shares to invest in another stock.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.