WHAT IS A COVERED CALL
- A Covered call is a stock strategy where you give up gains against payment over a certain level.
- You can choose the level where you decline further gains for a stock.
- You can choose for how long you give up further gains of the stock.
- Reduces uncertainty for investors, who receive a fixed amount directly instead of a uncertain upside.
- A covered call is more forgiving, you don’t need to be right about the market so often and can still achieve a good return.
- 60-80% of options end up being worthless at the expiration day. The daily erosion of value is one argument for selling options.
- The sellers are professionals such as insurance companies and sophisticated asset managers.
- Buyers are often speculative and/or private individuals.
THE TIME VALUE WORKS FOR US
- Does not give any fast, large gains.
- Gives a regular income when repeated on a regular basis.
- Provides flexibility better than most investment strategies.
- Buying options is speculation …
- … Selling options against shares is investing
- Sell call option against existing shares in portfolio.
- Buy shares and sell options (buy-write).
THREE SOURCES OF PROFIT
- Sold options (”the Premium”).
- Dividend from the stocks.
- A part of the increase of stock price.
WHEN DO YOU MAKE MONEY?
* if bigger declines occur, the covered call loses money but always less than the stock.
Both sides normally receive the dividends in a flat market.
7 ADVANTAGES WITH COVERED CALLS
- Receive money into the account from day 1.
- Increase the probability to make money.
- Allows holder to make a profit of 15-40% per year, if executed in a skilled way.
- Protects portfolio on the downside.
- Still has a part of the upside left (limited).
- Can make adjustment without buy/sell of shares.
- Can adjust the risk level.
- Follow stock price daily for sign of strength and weakness.
- Follow the news for specific stocks and general economic and political news.
- Select suitable call options considering expected and historic movements in the stock.
Consider the implied volatily (option premium), expiry period and strike price.
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