Investors who don’t want to take a lot of risks with their portfolio should consider opting for covered calls. This is an income-producing strategy where the investor sells call options against the stocks he or she owns. Usually, investors sell a contract for every 100 shares of stock. In turn, the investor collects a premium that comes with an obligation. When the buyer exercises the call option, the investor may need to deliver the shares of the underlying stock. But since the investor already owns the underlying stock, the potential obligation is covered or protected.
There are several reasons why investors turn to this strategy. Investors could earn additional stock positions that they already own. These calls can create fixed monthly revenue to mitigate risk. And finally, investors can cash in and earn premium income on those options that expire worthless (an important motivator, since over 75% of options are held until expiration and are worthless). In other words, the call option will expire, leaving the option premium to the investor who also keeps the shares of the underlying stock.
This investment strategy allows investors to earn extra income. It also works well for investors whose stocks prices are not moving or dropping a bit, but are still motivated to hold on to their stocks. Investors who take covered call options also want the value of their stocks to increase, but not so high as to overlap the strike price of the call. In effect, the investor not only keeps the premiums from the covered options sale but also gains from the rise in value of his stocks. This is basically a win-win strategy for any investor.
While this is generally seen as a conservative investment strategy, it also carries risks. There are risks for the call writer that affects him as the call seller and as a stockholder. As a stockholder, the investor may experience more loss if the value of his underlying shares tumbles significantly, even if there is a gain received from the option premium.
There is also the upside as a stockholder. As a stockholder, the investor had unlimited potential upside before selling calls. When he starts looking at his covered call options and writing one, he essentially suppresses his potential gains from owning the stock.
Learn more at Barchart.com, which now offers the best screener for calls on the market. With your subscription, you’ll receive thirteen different screeners, weekly and monthly options, and tables that display dividend expiration dates and upcoming earnings. Quickly search options by stock ticker symbol, and view information that includes Downside Protection and Returns calculated. Start your free 14-day trial today at www.barchart.com.
Residing in Mesa, Arizona, Brian Roy works as a freelance web designer with diverse interests. He enjoys the field of design as well as shopping, basketball, and playing the stock market. His adventures in investments have made him a knowledgeable source of market tips and tricks for covered call options and covered call – including where to find helpful resources, like Barchart.
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