Discover five ways to achieve financial freedom in five years or less by entering your email to the right unsubscribe at anytime In order to learn the Covered Call strategy you have to become familiar with selling stock options. I know, it would be so much simpler to just say selling, but as always, the financial community has to complicate things. So when you hear someone talk about writing Covered Calls they are just referring to someone selling a covered call.
If you recall from the earlier lessons, a Call option gives its buyer the "right, but not the obligation", to buy shares of a stock at a specified price strike price on or before a given date expiration date. Selling Covered Call options is a strategy that is best used when stock prices are trending in a channel or rising slightly.
It's similar to collecting rent on a house you own. For instance, suppose you were renting your home to someone and you let them "rent with the option to buy. Covered Call options work somewhat the same way. You will first buy shares of stock buy the house and then sell or write Call options against the stock rent your house out with an option to buy. So if you own shares of company XYZ, you would sell 1 Call option to someone giving them the "right" to purchase your stock from you.
In exchange for selling these rights, the buyer is going to pay you money. If the option doesn't get exercised, you keep your stock and the money you were paid for selling the option. You are then obligated to deliver shares of stock to the buyer at the set strike price. So far in all of the tutorials we talked about buying stock options. Covered call options is now where we begin to talk about being a stock option seller.
An option seller receives money from the buyer, and being an option seller, you want the stock option contract you sold to go down in value and eventually expire worthless. This is how sellers make money. When the options expire worthless, they get to keep the options premium they collected.
Covered Calls Explained | Online Option Trading Guide
So the person who buys a stock option has "rights," and the person who sells stock options has "obligations. An option seller is obligated to fulfill the terms of the stock option contract. So in the case of Call options, you will be obligated to sell your stock if the option is exercised. With Covered Call options you already own the stock, hence the term "covered.
So if you're selling stock options, you have to sell 1 call option for each shares that you own. Here are a few examples to help you out:. Covered call options deserve a website of their own. It's a fairly simple and straight forward strategy however, there are several ways you can utilize the strategy.
The following example is meant to be an overview. To fully understand how covered call options work, I'm going to go over an actual option chain. For this example I'm going to pull up the snapshot of 247 reviews of binary options software option chain that we used in the strike price lesson.
You decide you want to earn a little extra income from your stock by selling 3 call options risk writing covered call options strategy call options.
So you sell 3 contracts of the March call option to someone. That's how you sell a covered call. Yes, it's a bit more involved than that, but as I said before this was just an overview of the strategy.
It wasn't meant to turn you into a covered call option pro. So is this where I tell you that you sit back and collect money month in and month out and retire a millionaire?
If it were that easy, then everyone clicking ads to earn money be doing it. Without going into great detail, just know that there are generally 3 things that can happen after you've sold a covered call:.
In most cases, this is what you want to happen because you would have made some easy money. Since you sold the covered call option, you are obligated to deliver those shares to ruger m77 replacement stock buyer.
Once you sell a covered call, those shares are now obligated. You can't do anything with those shares as long as that covered call is still an open trade.
One way out of this situation is to buy the option back, which then frees up those shares and at this point you could sell the stock. Selling stock options, more particularly covered call options, are what many traders use to generate monthly income from their stock holdings. Trading covered call options happens to be one of my favorite strategies and one that I feel every trader should learn about.
Covered Call Options
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