If you have invested in stocks in a publicly traded company, you might think that the only way you have of trading in them is to buy or sell them. But you’re limited to these two only if you fail to consider the covered call option as a possibility.

The covered call option basically allows you to get a better income and to protect yourself from a falling market. But what is a covered call option at all?

A call option contract basically, is an agreement between a buyer of shares and a seller. Basically, with a call option contract, the buyer agrees to buy some shares by a certain date at a certain price. Now once such a contract is made up, it’s considered a potential sale. The contract itself can be bought and sold depending on how valuable the shares of the company in question are.

Now there are two kinds of call options – the first is the naked call option (don’t snigger); the other is the covered call option.

In a naked call option, you don’t even have to own shares to write up a call option contract. You just hope that by the time you are called on to deliver, you actually succeed in getting the shares at the right price. If you do succeed, you make a lot of money. If you don’t, you lose a lot of money. A covered call option on the other hand is when you write a contract up only when you actually own the shares in question. You don’t lose this much money on this new things go wrong.

So should you mess around in covered call options? Generally, this is a great idea for anyone who is very certain that the company whose shares he holds is going to do very well. He is confident that the shares will only rise. Doing a covered call option then allows him to protect his interests, get a new stream of income and lower the cost of his holdings. It’s a conservative way of going about owning shares. You get to come by better profits this way than if you just owned shares and sat on them.

Of course, if the prices of your shares rise significantly, then merely holding on to those shares without doing any of call options would be a way to go. But that doesn’t usually happen.

Here is a strategy people use with the covered call option called the dividend boosting strategy.

This is where you use the covered call option as a way to lower your cost of owning your shares. You’ll still collect all the dividends. Let’s say that you buy shares in the company at $15 each, and you get 18 cents as your dividend on each share. When you sell $10 call options for $5 each that expire in, say, three quarters, you right away get $5 on each share. That means that your cost of ownership of the shares is now $10 each. The shares could fall catastrophically to $11 each on the markets and you would still come out ahead.