Covered Calls for Monthly Income

Understanding A Covered Call Strategy

I’ve been writing call options on equity stocks for years and it is a great earner for blue chip stocks that you already own.

A covered call is generally considered to be an orthodox strategy that professional investors use for increasing the income from their investment. However, if an individual investor dedicates time for learning all about covered call strategy, they can profit immensely from this effective yet simple strategy. Read on to find out more about covered call and how one can incorporate this strategy in their portfolio profitably.

Covered Call- What Is It?

An individual has entitlement to many rights as stock owner. Among these rights, there is one that allows a stock owner to sell their stocks at market price whenever they deem necessary. When an individual writes a covered call, they are actually selling this particular right to another individual (the buyer of the call option) and being paid in cash immediately for selling the right. This implies that the individual gives away to the option buyer the right to purchase the individual’s shares prior to the expiration of the option (or at the expiration date), at a price that is predetermined, known as the “strike price”.

A call option is regarded as a contract that allows the option buyer the legal right to purchase 100 shares per option contract from the underlying stock whenever they deem necessary at strike price prior to the date of expiration. In such cases where the call option seller is also the owner of the underlying stock, the option then is considered to be “covered” as the seller can deliver those shares without having to buy them from open market at higher and unknown future prices.

How Is A Covered Call Beneficial?

In order to gain the right of purchasing the shares at strike price (predetermined price) in future, the call option seller is paid a premium by the buyer. This premium is primarily a cash fee that the buyer pays to the seller on the very day that the option is sold to the buyer. The seller can keep the money, irrespective of the fact whether the buyer exercises the option or not.

Selling The Covered Call:

If a stock owner sells their covered call, they get the money on the very day of the exchange of their stock’s forthcoming upside. For instance, let us assume that an individual pays $60 for each share of their stock and presume that the price will go up to $70 in a year’s timeframe. Again, the individual is ready to sell of the shares at $65 as soon as 6 months are over, believing that they are giving up on the forthcoming upside, an in return gaining a short-term profit by selling away the shares. This kind of scenario in which one sells off a covered call with regard to their stock position can prove to be a profitable option for the individual.

Next, we’ll look at how a covered call can benefit those who already own shares by looking an at example of selecting call options for covered calls.

Leave a Reply

Your email address will not be published. Required fields are marked *