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Ask the Institute

DATE: April 29, 2013

QUESTION:

Can you explain and give an example of an income strategy?

ANSWER:
In options trading, the term income strategy typically refers to the act of selling call options against an existing long stock position, otherwise known as a covered call. For an investor who owns stock, the primary manner in which they will attempt to increase the value of their portfolio is through the selection of stocks that they think will appreciate over the long-term. Typically, this can be a good strategy to implement as long as the market continues to rise.

However, as you know, the market doesn't always rise. It may drop, or it may remain in a tight range. As such, an investor may then choose to use options for income generation. An investor may decide to sell call options against their stock holdings. By selling call options, an investor can feasibly collect the options premium. To learn more about income strategies, view this week's segment of "Ask the Institute."


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