Covered
call writing strategy
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What is a covered call?
A “covered call” is
an income-producing strategy where you sell, or “write”, call options against
shares of stock you already own. Typically, you’ll sell one contract for every
100 shares of stock. In exchange for selling the call options, you collect an
option premium. But that premium comes with an obligation. If the call option
you sold is exercised by the buyer, you may be obligated to deliver your shares
of the underlying stock.
Fortunately, you already own the underlying stock, so your potential
obligation is “covered” – hence this strategy’s name, “covered call” writing.
Why write covered calls?
When you sell covered calls,
you’re usually hoping to keep your shares of the underlying stock while generating
extra income via the option premium. You’ll want the stock price to remain
below your strike price, so the option buyer won’t be motivated to exercise the
option and grab your shares away from you. That way, the options will expire
worthless, you’ll keep the entire option premium at expiration and you’ll also
keep your shares of the underlying stock.
If your stock’s price is neutral
or dropping a bit, but you still want to hold onto the shares longer-term,
writing covered calls can be a good way to earn extra income on your long
position. But remember, you’re also a stockholder, so you’ll most likely want
the value of your shares to increase – just not enough to hit your covered
call’s strike price. Then you won’t just keep the premium from the options
sale, you’ll also benefit from the shares’ rise in value. You really love life
if that happens.
How You Can Use Covered Calls Successfully?
We are providing technical tool for covered call strategy.
HOW DO TRADE IN COVERED CALL?
WE EXPLAINED HERE WITH STATE BANK OF INDIA.
