The strategy is known as "Covered Call" writing. The idea is simple. You sell a call for the stocks you own. If the price of the stock stays below the strike price of your call by the expiration date you keep the money. Else you end up selling your stocks at the price of the call.
Lets take an example of Google (symbol: GOOG). Suppose you have 100 shares of Google. Last Friday's closing price is $420.5. Now check various options available for GOOG. Suppose you are OK to sell your 100 shares for $430 by Oct 21st. You could sell one (1) call for approximately $10.25 (average of bid and ask for illustration purposes) per share.
Two things can happen
- Google goes above $430 by Oct 21st - you have to sell your shares at $430.
- Google stays below $430 by Oct 21st - you keep your shares.
Make sure you OWN the stocks before you sell covered calls. Else you will be taking on some serious risk. Consider reading more details at Chicago Board web site.
This is one of my favorite strategy. Enjoy!!!