The Covered Call Stock Option Strategy

Posted on September 20th, 2011 admin No Comments

A popular stock option strategy used by investors is the covered call. The covered call is one in which you would write a call option contract for a number of shares of stock you actually own. If you own the stock before writing the call option it is called an overwrite. If you buy the stock as you create the call contract, it is called a buy-write.

 

The stock you own is covering the call option contract which is where the name is derived from. This stock option strategy is generally used when the market is going sideways or you form an opinion that a bull market is developing.

 

With the covered option, the price for the underlying asset has been determined already unlike in a naked option where you don’t own the stock. When the option is uncovered, you will have to go to the market to buy the stock if and when it becomes necessary to cover the option. It is possible to cover your option at any time before the expiration date of the option contract.

 

The covered call stock option strategy is less risky than the uncovered option simply because you already know the price of the underlying asset. The covered call is used to generate income from the underlying asset or stock.

 

You get to keep the premium on the covered call and if the contract expires then you also profit from any gains in the stock value. If the option is exercised you will earn the premium in addition to the difference between the purchased stock price and the strike price. This stock option strategy can also protect you from underlying stock that that may experience a price decline.

 

The breakeven point for the covered call stock option strategy is equal to the stock purchase price less the premium received.

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Covered Calls Generate More Income At Low Risk

Posted on September 7th, 2011 admin No Comments

Covered calls refers to a low risk options strategy involving an investor owning call options as well as the asset underlying the options. It is probably the lowest risk options strategy that can be devised. The primary purpose is to generate income. The income is generated by selling the call option.

 

Selling call options opens up an investor to the risk of the options being exercised requiring the investor to supply the underlying shares. Under a covered call strategy, the investor already owns the underlying shares largely avoiding any negative consequences from this risk. The share ownership covers, or offsets the risk of, the call options.

 

Under the strategy the investor, by definition, holds a long position in both options and the underlying asset. If the price of the asset rises so that the owner of the options exercises the option and makes a call on the asset, the investor already owns the asset and simply transfers that ownership to the option owner. The investor receives the appreciated price for that asset. Naturally, the investor benefits to the extent that the price of the asset has appreciated.

 

The strategy is also known as a Buy Write strategy. The investor buys the underlying asset and then writes (or sells) the call options. The strategy is used when the investor has a short term neutral to negative view on the asset and for this reason hold the asset long and simultaneously holds a short call option position.

 

An example may help illustrate the strategy. An investor buys one hundred shares in AAA Company at one hundred dollars per share. The investor expects the price of these shares to remain flat or maybe even fall over the next few months.

 

Following the share purchase, our investor also sells ten thousand call options on XYZ shares at thirty cents for each option. The call options have a six dollar strike price and a two month expiry. This call option sale generates a three thousand dollar income for our investor.

 

Three outcomes are possible regarding the XYZ share price over the next two months. Firstly, it will stay constant within a band of five to six dollars. Secondly, it will decrease below five dollars. Thirdly, it will increase above six dollars.

 

In the first two scenarios, the share options expire worthless without their owner making a call on the shares. In both these cases, our investor continues to own the XYZ shares as well as generating a three thousand dollar income from the option sale.

 

In the third scenario, exercise of the call options is triggered. The investor is obligated to sell one hundred AAA shares. Total income from the share sale is ten thousand dollars. The investor also retains the one hundred option sale income.

 

In summary, covered calls offer a low risk strategy to generate additional income from share ownership. Selling (writing) call options does place a cap on the potential share price upside an investor can gain through share price appreciation. However, this is not a major consideration since the cap can be managed by the investor by choosing an option series with an appropriate strike price.

 

Source: Tim Leary

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What are the advantages of selling Covered Calls?

Posted on August 31st, 2011 admin No Comments

As any investor would know, a call option gives the person the right but not the obligation of buying a stock at the strike price by a certain date. When the stock price goes up, so does the value of the call option. So, the investor would buy the option hoping for the underlying share price to increase. This is one of the many day trading options that investors look out for to increase the returns.

 

One strategy that is often used by investors is to write call options. When the investor hold the underlying share for the option, then it is known as a “covered call”. The buyer of the options pays the additional premium for the right to purchase the stock at the prevailing option price at a stipulated future date. So what are the benefits of selling covered call options? There are basically three main advantages for this strategy.

 

The first one concerns cash flow. Many investors buy the stock with the main objective of selling covered calls. This is an income strategy which is less risky as it is approved by many retirement funds and can provide a steady income. The second advantage is due to hedging. There are times when investors buy the stocks of blue chip as investments for the longer term. However the stock might decline over the short term so investors hedge their position with a covered call. This strategy works when there is little upside or downside potential in the short term but big returns over the longer term. Lastly, there are investors who are looking to sell the stock at a higher price than what it is trading currently. If the stock has been trading at the fair value, the investor can get a higher price if a covered option is sold.

 

Source: Kingdom Calling

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Learn about Covered Calls

Posted on August 29th, 2011 admin No Comments

For those with a sizable portfolio of common stock there is a low risk trade which uses covered calls. This is a trade that sells call option contracts for immediate cash income. Because you own the underlying stock there is little risk with this type of trade. A great thing about this trading strategy is that it generates instant cash income. This is credited to your account immediately. This cash income makes it a powerful and profitable trading technique that you ought to implement.

 

Investors who have a large stock portfolio are not taking full advantage of the opportunities available to them if they do not execute these trades. Anyone who has a stock portfolio ought to be doing this income generating type of stock market trading. Experts strongly encourage those with a sizable stock portfolio to discuss this with their investment counsellors. It would be a shame to lose the income that you could be earning from doing this.

 

This is a unique type of trade because it is low risk and creates immediate income. It is a trade that can be repeated on a regular basis. Thus, it is a way to constantly create a flow of income into your brokerage account. This is real money that you can spend or invest anyway you please. An investment counsellor can explain all the technical details about how it works. The accounts are simple to open and your investment counsellor can set everything up for you.

 

This is virtually an operation that can run on automatic pilot with minimal stress and concentration on daily stock prices. In fact, even if the market goes down, you are still making income. It is a unique type of trade that anyone who owns a lot of common stock ought to be using on a regular basis. With such low risk and constant inflow of cash income, it is impossible to think of a reason not to be doing this.

 

It is easy to get started with this. Simply tell a broker what you want to do. You can open an account and begin selling call option contracts right away. You will have the peace of mind of knowing that you are earning cash income with little risk of losing anything. It is almost unbelievable how well this type of trading works for building up your net worth.

 

There is no reason to take a chance with risky and complicated investment schemes. Instead, you ought to investigate this conservative way to earn cash with your stock portfolio. The main advantage of this method is that you earn income right away. This is cash that is credited to your account and that you can use anyway you want. In addition, there is little risk with this. The combination of instant cash along with low risk is a powerful combination that you will appreciate.

 

The first step you ought to take in implementing this investment technique is to talk to an experienced and trained investment adviser. They can give you the advice you need to make good decisions with your investments. They can help you avoid common mistakes that those who do not know what they are doing often make. An experienced stock broker or investment adviser can be a big help in making good financial decisions. This is why you should consult with a skilled and talent investment counsellor.

 

Covered calls are a method to utilise your stock portfolio to create a stable inflow of cash income. If you have a sizable portfolio of stock then you should starting using stock option contracts to boost your total investment results. There are investment advisers who will help you get started.

 

Source: Tim Leary

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Covered Call Option

Posted on August 22nd, 2011 admin No Comments

When an investor uses covered call options, the investor sells a call option while owning the stock that is the underlying security of the call options. The stock that is securing the call option may be held by the broker handling the call options.

 

Using this strategy, the investor sells a call option for the same number of shares that the investor owns. A covered call is a fairly common options trading strategy.

 

The covered call option may be called an overwrite if the investor already owned the underlying stock at the time the investor sells the call options. A covered call option is sometimes referred to as a buy-write if the investor sells the call options and purchases the underlying stock at the same time.

 

By selling the call option, the investor is giving the buyer the right to purchase the stocks at the strike price of the option. The writer of a covered call trade often is expecting that the stock will not reach the strike price.

 

If the underlying stocks don’t reach the strike price, the call options the investor sold would expire worthless. The investor would then keep the option premiums as a profit. Any gain in the value of the underlying stock that is still below the strike price could also be considered part of the seller’s profit.

 

If the underlying stock reaches the strike price, the buyer has the right to exercise the option. If the buyer exercises the option, the seller must sell the stock shares to the buyer for the strike price. If the stock price increases drastically, the seller of the call has lost money that the seller could have made by selling the stock on the market.

 

The buyer of the call option makes a profit if the stock price rises above the strike price. The buyer can buy the stock at the strike price which would be less than the market price and sell the stock to get the profit from the trade.

 

The buyer’s risk is limited to the premium paid for the call option. Buying a call option is a common practice for a beginning options investor. While buying a call option has the risk of losing the option premium paid, the potential profit is theoretically unlimited if the stock rallies and makes a major upwards move.

Selling a call option is more risky than buying one because the potential loss for selling a call can be substantial if the stock rallies and the seller is forced to sell the stock at the strike price. The potential loss of a covered call option would be the difference between the strike price and the higher stock market price for the stock minus the option premiums received for the call options.

 

Source: John Mylant

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Covered Calls Investment

Posted on July 27th, 2011 admin No Comments

Sometimes covered calls are also known as Buy Write. They are a common technique used to trade in shares, foreign exchange, and other securities. In lay terms a cover call is a strategy where an investor holds a long position then waits for an opportunity for him to write call option. If this opportunity avails itself he has a chance of increasing his income.

If you use this tool well, covered call trading strategy has the ability to generate some good profits in the long run of any security. This tool is generally considered safe if not conservative though, it has a number of flaws which we are going to have a look at. We are also going to see all the ups and downs that surround this tool.

Before we continue it will be important to have a few definitions:

A long call option – In this case you buy a contract that allows you to purchase an underlying or a security on or before a specified future date. The price of the security is usually predetermined. This is the strike price. You will have to pay some amount for you to be able to hold this right.

Sell call option – This is an instance where you are the issuer of the long the call option. In this case the person whom you are offering the right pays you. Short the put option. Here you give an investor or trader a right to sell at a future date in which he does not have to sell to you. Basically these are the underlying points in any buy write strategy.

Source: Joe Suttles

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Why A Covered Call Strategy Is Considered Safe Investing

Posted on July 20th, 2011 admin No Comments

Covered Call strategy, which is a low risk way to earn income from a stock portfolio. The income is earned by writing options. Options are a leveraged investment where you can control a large number of shares with a minimal investment. Leverage allows the investor to obtain a higher rate of return on their investment. However, leverage also has some inherent risks.

As an investor you can buy options or you can write them. There are two types of options: calls and puts. A call option gives the buyer a right to buy one hundred shares of stock at a certain price for a limited period of time. A put option gives the buyer a right to sell one hundred shares of stock at a certain price for a limited period of time.

The price that you can either buy or sell the shares is called the strike price. The cost of the option is called the premium. Call option prices go up and down in tandem with the underlying shares of stock. Put option prices go up and down in the opposite direction of the underlying shares of stock.

If the owner of the option decides to exercise their option, the option writer will have to sell their shares of stock to holder of the option. This will incur a minimal loss. It is easy to see how this is a conservative investment approach for the option writer. There are ways of offsetting the deal to protect the option writer.

With leverage the investor has the potential to earn a higher rate of return on their investment. This is because they are only putting up a fraction of the full cost of the shares. The risk of using leverage is that the investor can be wiped out faster if there is an unexpected drop in share prices.

With leverage there is the possibility to make a greater rate of return on your investment. On the other side of the coin, a small price fluctuation can render your options worthless. For the writer of the calls options, the chances are that the option will never be exercised. If the price of the underlying stock does increase, the write of the option can always purchase an option to offset the transaction. This is what makes this such a safe investment.

When an investor has a large stock portfolio they can constantly be writing options to have a continuous flow of income. Since they already own the shares this is a relatively risk free income generating technique. Not all option techniques are as safe as this one is. There are very complex transactions that are put together by professional investors and hedge funds. The ordinary investor does have to concern themselves with these to earn a nice flow of income.

Using the covered call strategy is an easy and safe way to earn some income from a stock portfolio. Not all common stocks are listed on the option markets. For this reason, if you are interested in using this technique make sure the equities you buy are listed on the options exchange. A stock broker who specialises in options may be able to assist you.

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The Covered Call Stock Option Strategy

Posted on July 18th, 2011 admin No Comments

A popular stock option strategy used by investors is the covered call. The covered call is one in which you would write a call option contract for a number of shares of stock you actually own. If you own the stock before writing the call option it is called an overwrite. If you buy the stock as you create the call contract, it is called a buy-write.

The stock you own is covering the call option contract which is where the name is derived from. This stock option strategy is generally used when the market is going sideways or you form an opinion that a bull market is developing.

With the covered option, the price for the underlying asset has been determined already unlike in a naked option where you don’t own the stock. When the option is uncovered, you will have to go to the market to buy the stock if and when it becomes necessary to cover the option. It is possible to cover your option at any time before the expiration date of the option contract.

The covered call stock option strategy is less risky than the uncovered option simply because you already know the price of the underlying asset. The covered call is used to generate income from the underlying asset or stock.

You get to keep the premium on the covered call and if the contract expires then you also profit from any gains in the stock value. If the option is exercised you will earn the premium in addition to the difference between the purchased stock price and the strike price. This stock option strategy can also protect you from underlying stock that that may experience a price decline.

The breakeven point for the covered call stock option strategy is equal to the stock purchase price less the premium received.

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How to Make Money With Covered Calls

Posted on June 8th, 2011 admin No Comments

The old saying that ‘it takes money to make money’ is certainly true for an investment strategy known as ‘covered calls’. It’s an easy to implement strategy that generates income each month using stocks and ETFs you already own. It’s more conservative than buy-and-hold, and if you own any stocks or ETFs and are not doing covered calls then you’re leaving money on the table each month. With interest rates at historic lows and bonds poised for significant loss if interest rates go up, covered calls are a good strategy for self-directed investors.

What’s a call option?

A ‘call option’ is a contract between two people where one side has the right to buy 100 shares of a stock at a certain price (called the ‘strike price’) on or before a certain date (called the ‘expiration date’), and the other side is obligated to sell 100 shares. For example, an “AAPL Mar 350″ call option gives the buyer of the option the right to buy 100 shares of Apple any time between now and the 3rd Friday in March for a price of $350/share. In exchange for having this right the buyer of the option will pay the seller of the option (that’s you, the covered call investor) money today, which is called ‘premium’. The seller of the option keeps that premium no matter what happens to the price of Apple.

So, if you own 100 shares of AAPL you could sell 1 call option for a strike price that you determine and for a time horizon that you determine. If you think Apple won’t go over 370 by April then you could sell an Apr 370 call option.

The combination of owning 100 shares of stock and shorting (selling) 1 call option against it is called “covered call”.

What are the possible outcomes?

If the stock is below the strike price on expiration Friday then you keep your stock (and the call premium) and the option expires. You are under no further obligation. And, if you want, you can sell a new call option for the following month.

If the stock is above the strike price on expiration Friday then the buyer of the option (not you; you’re the seller) will ‘exercise’ his right to buy the shares from you at the strike price. You lose your stock but you get cash equal to the strike price. For example, if you sold an AAPL Mar 350 call option and the stock is at 360 at expiration then you will receive $350/share in cash for your shares. You didn’t lose money; but you may not have made as much as you could have (depends on how much the stock is over the strike price).

What’s really going on is that in exchange for some money today (call premium paid to you buy the option buyer) you are putting a cap on your upside by a certain date. The good news is that you can set the cap (strike price) as high as you want; but as you set it higher the call premium you receive today will be lower. The call premium gives you some downside protection (and current income).

The other good news is that you can do it every month. One strategy is to take all the stocks and ETFs you own and sell options that have a strike price that is 5% (or more) higher than the current stock price. If any of the stocks rise by more than 5% in a month then you will only see a 5% gain for that month (plus the option premium you received). If your stocks fail to rise by 5% in a month then the options expire and you can start over with a new set of options for the following month (choosing different strike prices if necessary).

How much can you make?

Depends on how close you set the strike prices to the current price, and how volatile the stocks you own are (more volatile stocks have higher option premiums). But, for a well-diversified portfolio of traditional large cap (blue chip) stocks you can probably make at least 1% per month (12%/year). It’s not get-rich-quick, but it sure beats the 2%/year that bonds pay. And if you add on a 3-4% dividend yield (if your portfolio has dividend paying stocks in it) then you’re talking about 15%+ per year, which over time will make you rich.

And, for the risk-loving, there are ways to make 3-5%/month with covered calls but you would be investing in highly volatile stocks to do so. If there is no sudden drop before option expiration then you will do okay, but highly volatile stocks are known to drop suddenly, so beware.

 

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Covered Call Terminology – Covered Call Writing Definitions and Terms

Posted on May 23rd, 2011 admin No Comments

Call Option – contract that gives the holder the “option” of buying 1000 shares of an underlying stock at a certain price by a certain date.

Writing a Covered Call vs. Selling a Covered Call – No difference – both terms describe the same process – specific terminology is based on personal preference.

Covered Call – What makes a covered call “covered?” When you write or sell a covered call and receive premium for granting someone else the write to buy 100 shares of the underlying stock from you at a certain price by a certain date, you actually must own those shares beforehand in order for the short call to be considered “covered” – the position is covered by your ownership of the stock in question.

Naked Call – When you write a call option but don’t actually own the underlying shares of the stock, the position is considered a naked call – there’s nothing “covering” or protecting the short call position. Note: this is an extremely risky strategy since your potential profits are unlimited, and it’s unlikely in any case that your broker would even allow you to set up this trade.

Buy-Write Strategy – A covered call strategy in which the purchase of the shares and the sell of the call are done simultaneously.

Strike Price – The price at which a call holder has the right to buy 100 shares of the underlying stock at or prior to the expiration of the call option contract.

Covered Call Premium – The payment you receive for writing or selling the covered call and granting someone else the right to purchase your shares from you at the agreed upon strike price during a set time period.

Expiration Date – The date at which a covered call option expires (technically, the Saturday following the market close on the third Friday of a given month) – the call can be manually exercised by the call holder at any time prior to expiration or, if the strike price is in the money upon expiration, it will be exercised automatically.

Exercise and Assignment – The holder of the long call (the other side of the covered call) can manually exercise the call option at any point prior to expiration and purchase the underlying shares from you at the agreed upon strike price. Upon expiration, if the call option is in the money (i.e. the share price is higher than the strike price), the option is automatically exercised. When a long call is exercised, it’s considered to be “assigned” to the writer of the call.

In the Money – A covered call is in the money when the strike price is below the current share price – example: a call option at the $30 strike price would be $2 in the money if the underlying stock traded at $32/share.

At the Money – A covered call is at the money when the strike price and the share price are the same – example: a call option at the $30 strike price is at the money if the underlying share price is also trading at $30.

Out of the Money – A covered call is out of the money when the strike price is higher than the current share price of the underlying stock – example: a call option at the $30 strike price is out of the money if the underlying stock is trading at $28/share.

Rolling a Covered Call – The act of buying back a covered call you originally wrote or sold at one strike price and expiration date and then writing or selling a new call at a later expiration date either at the same strike price (rolling out) or at a higher strike price (rolling up and out).

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