Covered Call Option Strategy - Easy Guide to Use Good Strategy

Covered Call Option Strategy

What is Covered Call Option Strategy?

Call option strategy is an option technique in which an investor maintains a long continuous position of an asset. The investor, in hold of these positions, then sells them. The motive behind this is to earn increased income from the same asset. “Buy- write” is another name of this strategy.

How Does It work ?

Assume that a person has some shares in a specific company. He knows its beneficial long term affects as well as the importance of its share value. But, future calculations show him that the return would be relatively flat in the short term i.e. within some dollars higher than the current price of the share value. If under such circumstances, you sell a call option, you will get premium on its sale, but limit your benefits. One of the following three circumstances will occur if you do this:

 

  1.  Share gets traded flat: this means that the trade value is lesser than the strike price. If this happens; then option will expire and shall be useless. You still retain the premium.
  2.  Shares of the asset fall: it is the same as if they get traded flat. The option expires without any worth. But the investor gets to keep his premium.
  3.  Shares of the asset rise: If such an event occurs; then, the option is utilized. This blocks your option as well as the premium. In such a case, if the stock prices increase the value and the premium, your strategy gets under performed by the shares.

 

When To Use Covered Call Option Strategy

Most of the time, it is used when you have a short term neutral opinion about the asset. For this reason, he keeps hold of the asset position for an extended period of time. At the same time, has a short position with the opportunity to earn profit from option premium.
Risk of using covered call option:

  • Like everything else there are some risks related to the application of covered call option strategy. Two major risks involved are.
    • If the value of the shares decrease considerably, the investor suffers a loss greater than the gain from the option premium.
    • The stock holder’s upside is limited.

Leave a Reply