Friday, May 29th, 2020

How to Write a Covered Call


A covered call option is an options contract sold by someone who owns the underlying stock, commodity, or future. To profit from writing calls one needs to learn how to write a covered call. So, what is a covered call? Owning stock provides a cover for selling a call on a stock. If stock prices go up sufficiently buyers of call options will execute call options contracts. By owning the stock already, sellers of call options need not lose money buying stock at the new, spot price. They will receive the strike price, the contract price, whatever the new price of underlying stocks, commodities, Forex contracts, or futures. The writer of the option always received the premium, the price of the option. How to write a covered call is, typically, to go through a broker. If the broker you use does not provide this service either on the phone or online it is time to consult another stock broker. Not all stocks have options. Check to see if your stocks are optionable. Then you can engage in this long options strategy.

How to write a covered call most profitably has to do with picking the strike price of the option. A very high strike price, compared to the current price of the stock, will sell for less but the contract will be less likely to be executed. Thus the owner of the stock and writer of the option will be able to recurrently sell options on his stock. This is a little bit like eating your cake and having it too. However, if the options writer chooses to sell an option with a lower strike price, compared to the current stock price, he runs the risk of having to sell his stock at the strike price and forego the profit he would have made on the stock when it rose in price. How to write a covered call most profitably is to have a clear idea about just where the stock is likely to go in price and only sell options when you believe the price will not go up. This strategy applies to how to trade stock options, in general.

How to write a covered call includes choosing a time frame. The longer the time until the call option expires the larger the time value of the option. That is to say there is more time for the stock, commodity, futures contract, or Forex contract to rise in value so that the buyer will execute it. The ideal situation in writing an options contract is for the owner of the equity to receive the premium, keep the equity, and repeat the process numerous times. An options trader will sell to open. He receives the premium immediately and assumes the obligation to sell should the buyer choose to exercise the option contract. This is often an occasional options trading strategy for those owning stock and wishing to add to their cash flow. Writing covered calls successfully can be like receiving an extra dividend check every so often.

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