Traders and stockholders have found
different ways to maximize their earning potential while minimizing their
risks. One of the more popular methods that traders utilize in the equity
markets is covered call writing.
Through covered calls, stockholders
write a call option for a shares of stocks at an agreed price (also referred to
as the strike price). The option buyer can exercise the option once the option
date expires. Typically, option buyers do so when the price of the stock has
become greater than the strike price.
Stockholders should have at least 100
shares of stocks to be able to write a call option.
In exchange for writing a call option, the
call writer receives a premium. The beauty of this arrangement is that the call
writer can keep the premium and the stock at the same time if the option buyer
does not exercise the call option once the expiration date sets in. According
to experts, selling stock options can earn a trader up to 60% or more a year.
It is a normal practice for stockholders and traders to successively write call
options on stocks, especially if they think that the value of the stocks will
not increase significantly in the future.
Aside from the extra income that traders
receive from call options, they are also protected against losses in case the
value of the stocks they own dip in the future. By entering into a call option,
a stockholder can at least earn extra profit just in case the value of the
stocks he or she owns slides in the future.
For instance, a stockholder writes an
option for shares of stock ABC at a strike price of $40 per share. The call
option expires after two months, with the stockholder earning around $5 per
share from the call option. However, the stocks of ABC slide down to $30 per
share, which means that the stockholder loses income opportunity. The
stockholder can still look at the brighter side since he was able to earn some
money by entering into a call option agreement. Likewise, the stockholder
retains possession of the stocks because the call buyer won’t proceed with the
call option given that the value of the stock has decreased.
Covered calls are considered to be
low risk investment strategies yet like all other investment moves, it still
has its risks. Stockholders and traders must study their options first before
writing a covered call. A call screener can help investors with their
strategies. Visit barchart.com to learn more.
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