When writing a covered call, you're selling someone else the right to purchase a stock that you already own, at a specific price, within a specific time frame. Since a single option contract usually represents100 shares, to run this strategy, you must own at least 100 shares for every call contract you plan to sell.
As a result of selling (writing) the call, you'll pocket the premium right off the bat. The fact that you already own the stock means you're covered if the stock price rises past the strike price and the call options are assigned. You'll simply deliver stock you already own, reaping the additional benefit of the uptick on the stock.
We've collected four simple ways to get more from your investment strategy:
You should considering working with stocks that have options with medium implied volatility. Why? Because they should provide enough premium to make the trade worthwhile.
Just like any trade, there are tax considerations for writing covered calls. Take a clear view of your long-term positions and investment objectives before making your move.
You've got to be ready for every contingency, including how to react if the stock goes down. Consider a buy-back strategy that will remove your obligation to deliver stock.
Reducing your market risk is crucial when trading options. Buy-writes are a strategy that involves buying the stock and selling the call option in a single transaction.