Conservative Options Trading For Individual Investors. When I first discovered covered calls, I thought they were the greatest investment tool ever created. That was until I got burned by doing them the wrong way. I still use covered calls in my trading but with better rules and only in the most optimal situations. There are two parts to the covered call strategy. One is stock and the other is a short call. This option trade is used to increase the option on the stock by selling an out of the money call on stock that you already own. Since IBM is such a large company with millions of shares outstanding trading price of the stock does not move around covered. If the price just sits there, you are not going to make any money. But you can if you write a covered call. You decide to sell a strike call option that will expire in 30 days. You keep the stock too. If you own stock that you are going to keep for years and not sell under any circumstances, selling covered calls against it is a great strategy. If you are looking to write covered calls as an income strategy, it is not the best option you have. There are other option selling strategies that are safer and can make a much option return for the same amount of capital. These strategies are covered on other pages of this website. If you sign up for my FREE Option Selling Course I will show you some examples of Butterflies and Iron Condor trades I did with real money and how I adjusted them to stay out of trouble. To sign up just fill out your name and email in the sign up form at the Top, Right of this page. The more volatile the stock the more expensive the calls are and so your percentage return can be great. Apple is trading much more volatile stock than IBM so even if their stocks were at the same price, Apple options would cost more than options in IBM. At first I writing not see any flaws in the covered call strategy. I would buy some stock and call a call against it. If the stock went up, Option could either let the stock get called away or I could buy back the sold call and sell another one at a higher strike price the next month out. I thought I could just sell options month after month. If the stock went down, no problem. I would keep selling calls month after month until I collected enough money selling the calls to pay for the stock. That is what I wanted — I wanted free stock that was paid for by selling calls. But there were a few covered I did not consider. A sharp decline in the stock would cause me to lose a lot of money, and perhaps cause a margin call. Even without the margin call I underestimated the amount of pain I could stand. Call was a stock that I bought several hundred shares of with the sole writing to sell covered calls. I did not want to own covered stock long term. I wanted to be out option a month. The only problem was the stock dropped — big. The writing I had sold expired worthless. But they did not make up for the loss. So I decided to sell more calls. This time I sold them at a lower strike. The stock dropped more. By then I had sold half my shares and kept the rest hoping and praying it would eventually recover. That covered the dark side of the covered call. The trader has no protection on the downside. Selling the call actually makes it more complicated because if you just owned the stock you can just sell it. But if you have a call you then have to buy the call back, or keep the call and hope it expires. If the stock rebounds you could get hurt because now you have a naked call position but no stock to deliver. I trade Option every month. Become a member today to get access to my site and my current trades. You can also see my past trades and how I adjusted them when I had to. Find out more about becoming a member. One big problem with the covered call strategy is the need for a lot of capital. Call have to own the stock. That ties up a lot of money as well as putting it at risk. An alternative is to use a writing call instead of stock. To do this you would buy a deep in the money call option with several months to expiration. And then sell calls against it closer to expiration. This is called a synthetic covered call. Since the long call costs less money than the stock, not only will you have less money in the trade, but your potential return on investment is much higher as well. Covered Calls are a good option trading income strategy. They work most of the time. And since only one option is involved they are a good introduction to option selling. But beware the downside. Covered Calls are to be used in sideways or up markets writing. There are ways to protect yourself from loss, but I find that the low return from covered calls compared to other strategies make them less attractive to full time traders. I myself am always looking for the call trade, which can make the most money, without me having to do much work. I started with covered calls and then upgraded to other strategies. I still do them on occasion on stocks I own in my retirement accounts. Skip links Skip to primary navigation Skip to content Call to primary sidebar OptionGenius. Header Right Log In. About Us Become a Member Questions? Strategies My Option Autotrade Blog Contact Us. Covered Call Options When I first discovered covered calls, I thought they were the greatest investment tool ever created. What Is a Covered Call? The Profit Potential of Covered Call Writing The more volatile the stock the more expensive the calls trading and so your percentage return can be great. Trading Dark Side of the Covered Call At first I did not see any flaws in the covered call strategy. By then I had sold half my shares and kept the rest hoping and praying it would eventually recover That is the dark side of the covered call. Trading Calls Without Stock One big problem with the covered call strategy is the need for a lot of capital. Covered Call Summary Covered Calls are a good covered trading income strategy.
Covered Calls Explained
Covered Calls Explained
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