What Are Covered Calls
One way to increase your profits on stocks is by Selling Covered Calls. Most investors don’t utilize this strategy to make the most off of their investments.
So what exactly are covered calls? Well selling covered calls allows an investor to make money up front in exchange for being obligated to sell their stock at a specific price on or before a specific date in the near future.
For instance if you buy a stock that is trading at $83 and sell the $85 call on if for $3 you would make $3 up front. However if the stock goes up above $85 you would be forced to sell it at $85, regardless of how high it goes up.
If the stock goes above $85 then the investor who sold the call could miss some of the profit, for instance if it went up to $90 that investor would be forced to sell it at $85 and not $90.
This means that the amount you could potentially make off of a stock is limited by selling the calls. But selling the call can be a very effective strategy, especially if the stock goes up a little or stays sideways. Covered calls can also relieve some of the pain if the stock goes down.
For example if the stock goes down to say $80 you would lose $3 on the stock but make $3 on the option that you sold which could mean you would have broken even on the investment instead of taking the loss.
In conclusion selling covered calls has a huge potential, especially if you invest into fundamentally strong companies with high dividend paying stocks. Covered calls may come with the added risk of losing potential profit; however the consistency which they bring can be well worth the risk in many cases.
Leave a Comment