Making Covered Call Options

If you want to know about the strategies involve in investing in covered call options, you should first know what it is all about.

A covered call option is the purchase of stock and the sale of a call option simultaneously or the sale of a call option against a stock currently held by an investor. Generally, one call option is sold for every one hundred shares of stock.

The writer gets cash for selling the call but he or she will be obligated to sell the stock at the strike price of the call if the call is assigned to the account. In simpler terms, the investor is paid to agree selling the holdings at the strike price.

Then, the investor gives up any increase in the stock above the strike price as an exchange for being paid.

If you feel neutrally or moderately bullish on the underlying stock, you should consider making a covered call option.

This strategy can just offer limited protection from a decrease in price of an underlying stock and it also offer limited profit participation in case there is an increase in stock price.

However, since you will be writing the call, you can generate income by getting the premium received. You can also have the benefits of stock ownership.

You can have maximum profit if the underlying stock price is at or above the call option’s strike price. It can be at the expiration date. It can also be when you are assigned an exercise notice for the call before the expiration date.

However, there is also a risk involved in this strategy. The financial loss can be substantial if the price of the underlying stock continues to decline as the written call expires. However, the loss can be offset by the premium you will receive from the sale of the call option.

Always remember that as long as the shares of stock are not sold, it would be a loss.

To start making a covered call option, you should follow these steps:

• Buy one of the stocks that have options available.
• Decide if you want to be bearish or bullish with your strategy.
• You should choose an option that matches your risk choice
• Sell that call option on the stock.

Here are some basic strategies you should remember about pricing:

• Stocks always move in n up and down cycle, not on a straight line. Always remember to buy at lows and sell at highs
• Control commission costs and fees by selling five or more contracts.
• Sell calls with only about one month before the expiration date. This usually produces high premium yields instead of options with two or more months until expiration.

One of the best benefits of covered call option is risk reduction. It provides protection against loss because of the higher price of the option. This means you can earn more profits in covered call options. Always remember that short-term options can mean less safety but more annualized profits.

Remember that writing covered call option is not for everybody. Some people lost a lot of money by doing this strategy.

You must first consult with your financial advisor before you even consider using this strategy. You can use Many more strategies when trading options, this is just one of them.