Writing or selling Covered Calls are a "moderate" investor's favorite strategy. It's so conservative that some retirement funds allow this strategy in their portfolio. It works particularly well when the stock in question doesn't move dramatically up or down, but rather just trends sideways.

Basically, it works for stocks that are deemed too "boring" for option plays. The Covered Call is a type of Synthetic Short Put strategy.

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These are "synthetic" strategies that have the same potential as other trading strategies. In this instance, a covered call is a Synthetic Short Put because it has the same earning potential as a Short Put option.

There are two main reasons for writing covered calls. The first is to provide monthly income on stocks that you already own but are not moving much. The act of writing the call will generate income from earning the option premium, and this can be repeated every month if the underlying stock price does not move.

The second reason is to increase the loss tolerance of the underlying stock. Since you earn the option premium when writing the call, the stock price will not need to go as high in order for your investment to break even or reach a target profit. The term "writing" refers to the act of selling stock options. So when we write covered calls, we are actually selling a call option.

Buying a call option gives you the right, but not the obligation, to buy a stock at a specified price at a specified date. Conversely, if you sell a call optionyou now have the obligation to sell the stock to the option buyer at the agreed upon price at the specified date.

So a Call Writer is agreeing to the obligation to sell stock, while a Put Writer is agreeing to the obligation to buy stock. When you buy an option, you buy the option to Open a Position, and sell it later on to Close the Position.

Similarly, when you Write options, you write the option to Open the Position, and you must Close the Position somehow, whether it's by letting the option expire worthless, or by buying the option back. In the case of selling Call options, remember that Call options are restricted stock units and divorce In-The-Money the higher the stock price goes.

How to Determine the Break-Even Point of a Call Option - Budgeting Money

So if you sell a Call option and the underlying stock price goes down below the option's worst stockmarket crashes price meaning the option becomes Out-Of-The-Moneythe option will expire worthless. You therefore don't need to do a thing, and can pocket the profit you earned by selling the option.

However, the danger happens when the stock price keeps climbing. If it keeps going up, it will never become worthless, and come expiration day, someone is going to exercise the option and buy the stock from you.

Writing Call Options - Selling Call Options Example

You will bp stock market quotes real time after be Called Out. The problem is you don't own the stock. You would need to buy the stock at the current market price which has gone upand sell the stock to the option blogger make money blogging at the previously agreed strike price, how to make money selling boats would have been lower.

This would cost you a lot! Considering that call option break-even price contract covers underlying shares, that's a lot of money. Therefore, selling stock options on their own, also known as selling Naked or Uncovered options, is extremely risky.

In order to lessen that risk, what we can do is to actually buy the underlying stock the same time we sell the option. For example, if you want to sell 1 contract of ABC options, you would buy shares of the ABC stock at the same time remember that 1 option contract is equivalent to underlying shares.

By buying the shares, we eliminate ozforex group limited asx risk of having to buy the shares later at a higher price in case we get called out.

This is called covering your call writing, ie. Let's return to our numerical example, but this time we write covered calls on it. Let's look at 2 scenarios, one where the stock went down in price, and another where the stock climbs above the option strike price. And we still own the stock.

Compare this with just a simple purchase of the stock. When we write covered calls, ie. That is our break even level. As long as the stock price stays above that level, we binary options book pdf. Anything less and we lose.

That's why we need to look at stable or moderately bullish stocks to consider for our covered call trades. This is important in the stock market, where stocks we buy usually don't go up the way we expect them to However, there is no risk, because we already own the stock, and can just sell it immediately.

Now let's take a look again at Scenario 1. The Call option has expired worthless, and we keep the stock. This means that month after month we can keep selling stock options on those shares we own, and as long as we don't get called out, we can make constant monthly income.

And what if we get called out?

As Scenario 2 shows, getting called out still earns us a profit. This is how investors write covered calls to generate a monthly income. Not bad for a strategy that's almost risk-free! However, do note that if you are unlucky enough to choose a stock that keeps falling lower and lower, no strategy is going to help you! Unless you buy a Put option on that stock to reduce your losses.

On a side note, some investors who have held particular stocks that haven't moved for a long time can also decide to write Covered Calls. They can sell call options on their stock, and either earn monthly income on the stocks, or sometimes hopefully!

Understanding Stock Options Trading and Technical Analysis Basics. When you are Writing or Selling stock options, you are agreeing to the obligation to fulfill the option contract, which is to sell stock in the case of a Callor to buy stock in the case of a Put. Selling stock options on their own is known as selling Naked or Uncovered options. They are extremely riskyand can result in unlimited losses. We write covered calls by buying stocks to cover an option sale.

This is a conservative strategy that can be used to create monthly incomeby selling call options month after month. Other Topics in this Guide Bullish Strategies Bearish Strategies Neutral Strategies Volatile Strategies. Other Topics in this Guide Bullish Strategies Bearish Strategies Neutral Non-Volatile Strategies Volatile Strategies.

All stock options trading and technical analysis information on this website is for educational purposes only. It should not be considered the sole source of information for making actual investment decisions.