A covered call is an investment strategy that many traders opt for in order to protect themselves against sudden changes in security prices. With this trading option, the person who holds a security, such as a stock, sells the rights to the security at a strike price set in the future in exchange for a premium. When the price of the security does not become lower than the strike price, the call writer not only gets to keep the premium but also the rights to the equity. Traders and investors who write covered calls often use a covered call screener to enable them to more easily find covered calls that are suited to their investment strategies.
Depending on their goals, there are different strategies that traders employ for covered calls. There is the supplement return strategy wherein the call writer sells covered calls primarily for the extra profits they can derive from the premiums. The call writer believes and expects that the price of the security will continue to rise but not fall. The call writer expects that he or she will hold onto the security.
Another motivation for call writers to write calls is to protect their portfolio against losses. This strategy is often employed after a rise in the value of the security. By selling their securities through covered calls, traders can protect their portfolio against sudden and unforeseen decreases in prices of securities.
Traders who engage in covered calls also speculate about the prices of securities they are selling. Traders can double their income by selling covered calls successively. It is likely that traders can double their profits if they sell covered calls that have a 10% return in a month. These traders usually consult call screeners in order to find calls that have the highest returns.
Like any other investment strategy, covered calls have risks. Though it is considered to be a conservative strategy, calls can also make a trader or call writer lose money if the security price drops significantly. Calls for highly volatile securities are riskier compared to writing calls for securities with low volatility.
Writing a covered call can be a great option for traders who want to maximize their profits and spare their portfolios from losses brought about by sudden drops in the value of securities. Using a covered call screener makes it much easier for traders to find, buy, and write covered calls that are appropriate to their investment strategies. Sign up for a complimentary trial for Barchart’s screener at www.barchart.com.
Brian Roy is a freelance writer that’s based in Mesa, Arizona. He’s very interested in watching the stock market and often gets the latest information and data on Barchart.com. Read his informative articles to learn about excellent resources to become a better investor.
The Various Strategies Involved in Covered Call Writing