What Is a Covered Call Option Explained - Selling

A covered call refers to a financial transaction in which the investor selling call options owns an equivalent amount of the underlying security. ... The investor's long position in the asset is the "cover" because it means the seller can deliver the shares if the buyer of the call option chooses to exercise.

1. What does selling covered calls mean?
2. Can you lose money selling covered calls?
3. Should I sell covered calls?
4. How does a covered call work?
5. What is a poor man's covered call?
6. Why covered calls are bad?
7. Can covered calls make you rich?
8. What is the downside of covered calls?
9. What is the max loss on a call option?
10. How far should you sell a call?

What does selling covered calls mean?

Selling covered calls is a strategy in which an investor writes a call option contract while at the same time owning an equivalent number of shares of the underlying stock. Learn the basics of selling covered calls and how to use them in your investment strategy. ... Provides an overview of covered calls.

Can you lose money selling covered calls?

The maximum loss on a covered call strategy is limited to the price paid for the asset, minus the option premium received. The maximum profit on a covered call strategy is limited to the strike price of the short call option, less the purchase price of the underlying stock, plus the premium received.

Should I sell covered calls?

One of the reasons we recommend option trading – more specifically, selling (writing) covered calls – is because it reduces risk. It's possible to profit whether stocks are going up, down or sideways, and you have the flexibility to cut losses, protect your capital and control your stock without a huge cash investment.

How does a covered call work?

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. ... 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.

What is a poor man's covered call?

A "Poor Man's Covered Call" is a Long Call Diagonal Debit Spread that is used to replicate a Covered Call position. The strategy gets its name from the reduced risk and capital requirement relative to a standard covered call.

Why covered calls are bad?

The main problem with the covered call strategy is that it flies in the face of why you own stocks in the first place. While dividend income can be an important factor in choosing a stock for the long run, a big part of how stocks add value to your portfolio over time is through price appreciation.

Can covered calls make you rich?

Selling covered calls can generate income of roughly 2 to 12 times that of dividend income received from the same stocks. Living off traditional investments has become challenging since the yields from both stock dividends and bond interest are so low, leading investors to consider covered calls.

What is the downside of covered calls?

There are two risks to the covered call strategy. The real risk of losing money if the stock price declines below the breakeven point. The breakeven point is the purchase price of the stock minus the option premium received. As with any strategy that involves stock ownership, there is substantial risk.

What is the max loss on a call option?

Max loss is the total cost you paid per contract x 100 shares. Max loss occurs if you hold the option until expiration day and it expires out of the money (it expires worthless because the stock didn't move in the direction you wanted it to and you lose the entire cost of what you paid for the option).

How far should you sell a call?

What Is Considered a Far Out Covered Call? Covered calls with an option expiration date within days or a few weeks is considered short term. On the other hand, covered calls with an option expiration date more than five to six weeks away is considered far out.