Selling Covered Calls – About Call Options
There are numerous ways to protect your investment portfolio, from buying puts to selling covered calls. When you write a call, this means that you are selling someone else the right to purchase a stock from you at a predetermined price, called a strike price. This figure will be set by the option series. Because you are the writer, or seller of this call, you are short the option, while the buyer is long the option. This means that you are obligated to sell the stock if the buyer decides that he or she wants it at any time.
To profit or use this process of selling covered calls in your favor, you are hoping that the stock price does not change, that you can collect any premium associated with it, and that the option will expire before the buyer exercises their right to use the call option. In the event of a covered call, you already own the shares, as opposed to a naked call, which means that you don’t own the stocks yet but will have to purchase them if the buyer exercises their call options. There is some element of risk in these strategies, because you will be basing your actions on what you think the buyer will do, and whether you think the stock will change in price at any point.
The benefit of selling covered calls is that it is a good strategy for those who want to protect their own portfolio, because you can collect income from these call premiums. If the call expires and is worthless, you then get to keep the stock anyways, and the dividends associated with it for the time that it was in play. To get started with this option, however, you have to be approved by your broker, but there aren’t as many restrictions on writing covered calls as there are on writing naked calls.
The one thing to keep in mind is that selling covered calls is a strategy that works the best only in stocks that experience very little movement. If you don’t anticipate the value to go up or down too far, then you may wish to offer this as a covered call for sale. You want the stock to stay as consistent as possible, so that you can collect the premiums at a profit and lower your own average monthly costs in the long run. Always consult with your broker before attempting this protective strategy for best results, and choose your stocks wisely.