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