Financial market trading may be profitable for individuals who grasp the tactics. One method novices like is the covered call.
A covered call?
Covered calls involve an investor buying a stock and selling call options on it. Call options sold are usually out-of-the-money, meaning their strike price exceeds the asset’s market price.
Covered call strategies aim to profit from call option premiums and asset price gain.
This method has less risk than others, making it appealing to novices. Let’s examine its operation and main components.
Components of Covered Call Strategy
1. Underlying Asset: Choose an asset you possess or want to acquire. This is usually a stock you like and think will rise somewhat.
2. Call Options: Sell stock call options next. Strike price and expiry date are set for these options. The strike price should exceed the stock’s market price.
3. Premiums: Call option sellers earn premiums from purchasers. The premium obtained depends on stock volatility and expiry date.
4. Covered Position: You own the stock, thus your call options are covered. If the options are exercised, you may deliver the stock without buying more.
Advantages and Drawbacks
Premium income is a major advantage of a covered call strategy. In a sideways or somewhat positive market, when stock prices are steady, this might be advantageous.
Premium income is appealing, but it restricts your return if the stock price rises dramatically. In a strong bull market, the stock price may exceed the call option strike price, missing profit possibilities.
Covered call strategies risk losing money if the stock price drops drastically. Premiums may help offset losses, but they may not entirely safeguard your investment.
Conclusion
Trading novices like the covered call strategy since it’s low-risk and profitable. Understanding its major components and hazards lets you use this approach to boost your trading portfolio.
Sources and Links
Investopedia: https://www.investopedia.com/terminology/coveredcall.asp
Option Industry Council: https://www.optionseducation.org/advancedconcepts/advanced-concepts-6