Covered call options can earn you more money. Here's how they work.

Q - Could you please explain what a covered call option is and how it works? – David S.

A – Covered call options involve selling someone else the right to buy a stock you own at a specific price, within a set time frame. You receive a payment (premium) for doing this. If the stock reaches the target price before the option expires, it is called away and you receive the agreed upon payment for it. If it does not, then the option expires unused and you can sell another one. Canadian options trade on the Montreal Exchange.

For example, let's consider BCE, which was trading at $57.78 at the time of writing. The bid price for a May 19 call option on the stock at a strike (selling) price of $60 was $0.16. If you owned 1,000 shares, you could have earned $160 (less any commission) by selling covered calls against your stock. If the shares did not hit $60 by the expiry date, you could repeat the process all over again.

The upside of this strategy is that it generates more cash flow from a portfolio. The downside is that it limits the capital gains potential on a stock to the agreed-upon strike price. – G.P.

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