This small book outlines the author’s success with a stock market strategy known as selling covered calls.

A call is simply a “bet” that a stock will go above a particular price within a certain period. The price is known as the “strike” price. The period is a particular month, on the third Friday (that’s standard).

It’s easy to understand with an example — AT&T $50 Dec 09.

AT&T is the particular stock. $50 is the strike price. December 2009 is the expiration date.

If AT&T is selling today at $47, then it must go up. If it goes down, the call buyer will lose money.

There’re a lot of books and newsletters on how to make money by buying options. You can often buy them for around $1-$2. If the stock goes up, the option price increases.

If the price goes above the strike price, say to $55, you as the option owner have the right to “call” the stock away from its owner and giving them only $50 per share, then selling it on the open market for $55, making $5 per share profit.

You can make a lot of money that way — if the price goes up.

If it goes down or sideways until the third Friday of December, you lose all your money. On that date it becomes ancient history.

Frankly, the standard industry figure is that 80%-90% of all options lose money. So it’s rarely the get rich quick method that some people claim.

This book turns things around. Just as you can buy calls, you can also SELL them. The call buyer has to pay $1-$2 per share, so that cash goes into your brokerage account. It’s yours. You get to keep it no matter what. Sounds good so far.

If you sell them and the market price does reach the strike price and the stock is called away from you, then you have to give it up.

If you don’t own it, you have to go into the market, buy it for its current price of $55 and then sell it to the call buyer for $50, for a $5 per share loss. That’s called going “naked,” and it’s risky, and not the subject of this book.

If you own the stock, you’re “covered.” You sell the call. Its market price goes above the strike price, so the call buyer calls it from you at the strike price of $55.

You still keep the cash you received in exchange for the calls you sold.

The rest depends on when and for how much you paid for the stock. If you bought it for $30, then you still made a $25 per share profit. The only drawback is paying the capital gains taxes.

Plus, if the market value continues to go up, you get no benefit from it. You sold the stock. It’s no longer yours. If you want it again, you have to pay the higher market price just like anybody else.

If you decide you want to hang on to the stock you own, when the current market price goes up, you’re forced to buy the calls back at a loss.

If do what’s called a “buy write,” then you bought the stock just as you wrote (sold) the call, and so you made a profit but not a big one and you’ll pay short term capital gains tax.

However, let’s remember that market prices of stocks don’t change in just one direction. They not only go up, they can go down.

If you bought a stock just to make money from selling calls, you may make that $2 per share but find that the stock price DROPS $20. You have your cash from selling the call, but you’ve lost more money than you made.

Don’t laugh — it’s happened to me. When the Dow Jones went from 14,000 in November 2007 to 6,900 in March 2009, it happened to a lot of people.

This book makes covered call selling look easier than it can be. In one example, for instance, he addresses the point about how you have to buy back a call at a loss to keep from losing the stock.

If the market price reaches the strike price, he says to buy back the call with the proceeds from selling another call for a yet higher price.

Nice try — but it’s a lie on two counts.

First and foremost, it’s illegal to sell two calls on the same shares of stock. You’ll have to come up with the cash to buy back the original calls before your broker allows you to sell new calls.

Secondly, the new calls for a higher price will not be worth as much as calls that are “at the money.” Meaning their strike price equals the market price.

This book goes into these case studies without ever really describing a general plan of action. And as mentioned, his scenarios and advice can be full of holes, to put it politely.

Chapter 8 is full of charts and advice about the timing of selling and buying options based moving averages and exponential moving averages.

If these kinds of techniques worked long term, the large institutions with billions of dollars to spend on proprietary software programmed by Ph.Ds in Finance would control the market. And you and I couldn’t even hope to compete.

Covered call selling is not a free lunch.

It can provide a nice supplemental income — for a while.

Sooner or later you’ll buy a stock that goes so too far down in price. Selling covered calls on a stock is possible, but just means you lose a little less money.

If you sell during a bull market (when we will see one of those again?), your stock may not go down a lot, but the money you receive for your stock will be lower, because the market knows that the stock will probably go up with the market.

Sooner or later the stock you own will be called away from you. That’s okay if you don’t want to keep it. If you already own some stock and want to sell it and you’re not in a hurry and you’d like to squeeze a few extra dollars from it, then selling covered calls is just right for you.

Don’t ever sell calls on stock you want to keep in your portfolio for the long term.

And the money you would have used to buy this book or another one claiming to teach you how to make money from options? Put it into your money market account, that’s my advice.