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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121179  
Subject: Re: Selling the "Rights" to a stock Date: 3/27/2000 4:08 PM
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You can sell an option on the stock if you wish; this is perfectly legal. It doesn't work quite like you describe.
Say you own 100 shares of stock now trading at $50.
You paid $40 so you have a capital gain. You may be able (may because there are not options on all stocks) to sell someone the right to buy it at $50 any time until June. Depending on the market, that option may get you $500. If the price of the stock in June is $52 a share, that someone will exercise the option (right) to buy it at $50. You have now sold the stock at $50 per share and you keep the option premium, with which you can pay the taxes. Note that you cannot sell the stock in the meantime (unless you buy back the option) because if the person to whom you sold the option wants the 100 shares, you have to have them to deliver.
Also note that the buyer of the option has the right, but not the obligation, to buy the stock at the stated price. If the price of the stock in June is $45, the option will expire worthless. You keep the option premium, and can sell another option if you wish.
The selling of options on stocks that you own is a technique for producing income from stocks that don't pay dividends. Sometimes it works, but Wise mutual fund managers do not beat the market with this technique. If the stock price goes up a lot, you have sold the right to buy at a price much less than the market; if it goes down a lot you are stuck with a stock that has not done well. So your winners get taken away, you are left with the losers.
Is this what was suggested to you? Regards, Chris
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