Print Selling covered calls is a great way to create yield in a near-zero interest rate environment.
Options Trading Basics Uncovering the Covered Call: An Options Strategy for Enhancing Portfolio Returns Selling covered calls is a neutral to bullish trading strategy that can help you make money if the stock price doesn't move. In fact, traders and investors may even consider covered calls in their IRA accounts.
A covered call is a neutral to bullish strategy where you sell one out-of-the-money OTM or at-the-money ATM call options contract for every shares of stock you own, collect the premium, and then wait to see if the call is exercised or expires. Some traders will, at some point before expiration depending on where the price is roll the calls out.
To covered option yield a covered call, you short an Covered option yield call against stock you own.
How to Increase Yield Using Covered Calls
If it expires OTM, you keep the stock and maybe sell another call in a further-out expiration. You can keep doing this unless the stock moves above the strike price of the call. When that happens, you can either let the in-the-money ITM call be assigned and deliver the long shares, or buy the short call back before expiration, take a loss on that call, and keep the stock.
Say you own shares of XYZ Corp. There are several strike prices for each expiration month see figure 1. If you might be forced to sell your stock, you might as well sell it at a higher covered option yield, right?
Some traders take the OTM approach in hopes of the lowest odds of seeing the stock called away. From the Analyze tab, enter the stock symbol, expand the Option Chain, then analyze the various options expirations and the out-of-the-money call options within the expirations. For illustrative purposes only.
Past performance does not guarantee future results. As long as the stock price remains below the strike price through expiration, the option will likely expire worthless. As the option seller, this is working in your favor. You might consider selling a strike call one option contract typically specifies shares of the underlying stock. If the call expires OTM, you can roll the call out to a further expiration. Keep in mind that the price for which you can sell an OTM call is not necessarily the same from one expiration to the next, mainly because of changes in implied volatility vol.
Rolling Your Calls
When vol is higher, the credit you take in from selling the covered covered option yield yield could be higher as well. But when vol is lower, the credit for the call could be lower, as is the potential income from that covered call.
Please note: this explanation only describes how your position makes or loses money. How to make money make money rolled positions or positions eligible for rolling will be displayed.
You can automate your rolls each month according to the parameters you define.
But if the stock drops more than the call price—often only a fraction of the stock price—the covered call strategy can begin to lose money. The bottom line?
If the stock price tanks, the short call offers minimal protection. Select Your Strikes Accordingly Notice that this all hinges on whether you get assigned, so select the strike price strategically.
This is about as old-school as you can get.
Covered Calls - Covered Puts
If the stock hits that resistance level and holds steady until expiration, you might hit your full profit potential for that expiration period.
For example, a call with a 0. Weighing the Risks vs.
Benefits You might be giving up the potential for hitting a home run if XYZ rockets above the strike price, so covered calls may not be appropriate if you think your stock is going to shoot the moon. Keep in mind that if the stock goes up, the call option you sold also increases covered option yield value.
What happens when you hold a covered call until expiration? First, if the stock price goes up, the stock will most likely be called away perhaps netting you an overall profit if the strike price is higher than where you bought the stock.
For call options of the same expiration, their values decrease as the strike price increases, since a call gives the holder the right to buy the shares at ever higher prices than the current market price. Determining the appropriate covered call to write is thus a trade-off between the expiration and strike price. Since we are writing calls, the bid price must be considered as that is where market participants are willing to buy from you.
A covered call covered option yield some limits for equity investors and traders because the profits from the stock are capped at the strike price of the option. The real downside here is chance of losing a stock you wanted to keep.
Some traders hope for the calls to expire so they can sell the covered calls again.
Writing Covered Calls on Dividend Stocks
Others are concerned that if they sell calls and the stock runs up dramatically, they could miss the up move. Covered calls, like all trades, are a study in risk versus return. With the tools available at your fingertips, you could consider covered call strategies to potentially generate income.
He was formerly a market maker for a Chicago options trading firm and lectures and coaches on options trading.
Investing Basics: Covered Calls.