Today we’re going to look at the covered calls for dummies, including why we make them, how we make them, and how we manage them.
ON covered call is a strategy whereby you sell (write) a call option while owning shares of the underlying stock.
The goal of selling (writing) a hidden call is to increase your income while you own the stock.
The income (rewards) you get from the sale of the call also covers a decline in the stock price.
Owning the stock and writing the call can outperform owning the stock.
The stock price can fall, stay the same, or rise slightly to be profitable.
This strategy; Writing call options and owning stocks are reduced volatility, (the higher the volatility, the higher the risk).
An investor buys 100 shares of XYZ common stock at a price of $ 48.
The investor sells 1 XYZ call option on July 50.
This is known as a covered call.
You received $ 300 from the sale of the July 50 call.
Maximum profit: Distance between share price & short call + premium from the sale of the call.
Break even: Share Price – Credit from Short Call
Loss: When the stock price drops well below the $ 300 premium you received.
Choose cheap stocks with a high implied volatility percentile. High IV means that more premium is received for selling the call.
You can trade high beta stocks that generate a lot of premium, but the stocks also move a lot, which can be stressful.
I prefer low beta stocks and ETFs like KO, JNJ, PFE, IYR.
Free covered calls course
The short call is usually In the money (ITM) or Out-of-the-Money (OTM).
The OTM call offers higher reward potential, but is riskier than the ITM call.
End covert calls when the stock price has topped your brief call. that gives you almost the maximum profit.
You should close a covered call if the stock price drops significantly.
We will roll down our call when the stock price falls.
If the stock price stays roughly the same as when the trade was executed, we can extend the short call by buying back our short option and selling another call on the same strike in another run.
If you’re selling a call, someone can exercise This means that you will be forced to sell your stocks.
Lets see what happens:
The stock was $ 48 / share when you bought it.
The stock moves up to $ 50 / share.
Someone “gets” the stock for $ 50 (buys it).
You make $ 200 on the stock. (100 shares X $ 2 = $ 200).
You will still keep your $ 300 balance on the option.
Total profit: $ 500 ($ 200 + $ 300).
So an assignment isn’t necessarily a bad thing as it generally means that you made a profit on the trade. However, you no longer own the shares and have to look for new opportunities.
Let’s compare the returns for low volatility and high volatility Stocks.
AAA stocks are more volatile than XYZ and therefore have a higher option premium.
Here are the prices:
You can see from the table above that stock AAA brings you more premium ($ 6) than XYZ ($ 4).
From the table above, it can be seen that the more volatile stock AAA has a potential return of 13.6%. XYZ with a lower yield of 8.7%
Note: Commissions and dividends are not included. There are also many different ways to build this trade. This is a basic explanation for educational purposes.
Disclaimer: The information above applies to For educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.