Covered Calls Options Trading Strategy
Covered call or buy-write or over-write is perhaps the most popular and traditional options trading strategy which includes limited profit and limited risk nature. Covered calls are practiced when the trader writes options for already bought underlying instruments. The covered call options which are generated using freshly bought underlying instruments is termed buy-writes and those generated using long held underlyings is termed overwrites.
Covered calls are usually practiced when investors expect limited volatility in the underlying instrument prices they hold. Thus they try to make more profit from the stocks by writing call options for a strike price, usually above the current trading price. At the expiration date if the underlying product price is around or below the strike price the option expires worthless and the trader can profit from the initial options premium. If the underlying stock price increases above the option strike price, and the option is exercised, the trader can still make the profit which is a sum of initial premium and the difference between the strike price and underlying purchased price.
The loss occurs when the underlying stock price falls considerably. In this case the call option when expire unexercised by the trader then face a loss which is equal to the difference between the dropped price and the initial option premium. The main advantages of covered calls include the limited risk and the earning of dividends during option period.
Covered calls are usually practiced when investors expect limited volatility in the underlying instrument prices they hold. Thus they try to make more profit from the stocks by writing call options for a strike price, usually above the current trading price. At the expiration date if the underlying product price is around or below the strike price the option expires worthless and the trader can profit from the initial options premium. If the underlying stock price increases above the option strike price, and the option is exercised, the trader can still make the profit which is a sum of initial premium and the difference between the strike price and underlying purchased price.
The loss occurs when the underlying stock price falls considerably. In this case the call option when expire unexercised by the trader then face a loss which is equal to the difference between the dropped price and the initial option premium. The main advantages of covered calls include the limited risk and the earning of dividends during option period.
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posted by Daniel Pipitone at
12:12 AM
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