A covered call is a popular strategy among new and experienced traders alike. For those unfamiliar with a covered call, it is a strategy in which individuals that currently own a stock “write” (or sell) contracts of the stock at a set price with the hopes that they will earn extra revenue. Though it may seem as if a trader is attempting to sell his stock, he actually owns the stock and is simply attempting to sell a portion of his shares. These contracts are referred to as option contracts. When the stock reaches the price detailed on the option contract, the owner of the stock will have to sell the stock to the individual that purchased it. However, the stock remains “covered” because the seller still owns a portion of the stock. This is a favorable option for individuals that purchased a stock at a lower price than what it is trading at now. These individuals have already made a profit on their initial investment and are now attempting to earn some extra revenue.
Traders that pursue this option can either succeed in their attempts to increase revenue or they could lose a portion of their shares if the price increases more than anticipated. For example, an individual attempts to sell shares at a set price so he creates option contracts representing these shares. He receives the total amount for the shares before anyone has purchased them. However, another individual can now purchase these options contracts at the current market price. If successful, the individual that pursued this option will receive a premium, but if the prices of the stocks skyrocket and someone buys, they will lose out on a substantial amount of money.
Obviously, to sell covered call is an investment that is likely to be worthwhile in the end. It is a simple and efficient way to create a contingency plan when investing. Covered calls can help secure a trader’s future as he pursues riskier trading and investing ventures.
Emily Ewing is an intelligent lady that makes the most of her life through travel and
learning. Recently, she backpacked through Europe with income she generated through smart investing. She loves to write about her experiences, stock market tips, and more to reach out and share with readers. For stock market advice, she depends on Barchart.com, but she is not an employee or affiliate of this organization.
Selling a Covered Call as Contingency Plan