Covered Call Writing Benefits

One of the most conservative investment strategies employed by stock options traders in known as covered call writing. This strategy involves the sale of options on stocks that are already owned. It is called “covered” because the underlying stocks are owned, limiting the risk to which a seller is exposed.

This contrasts vividly with naked call writing where a stock option is sold on stocks that the person does not own. This leaves the seller “naked” and vulnerable with unlimited risk if the price goes up.

Ideal stocks for this type of trading are those on which the seller does not expect to see any major movement in either direction during the term of the option. This is because the ideal situation would be that the stock is still trading below the strike price (the price at which the stock will sell if said option is exercised) when the period expires. In this case, the person holding the open option will likely allow it to expire without exercising option rights.

This creates a scenario where a seller profits by keeping the premium for which the options were bought. The buyer simply allows the option to expire. The selling party still owns the underlying shares. However, if the price goes above the strike price, the buyer may exercise for stock at the agreed-upon price and profit from the trade as well.

Stocks that go down in value can result in the seller having to buy back the options he sold. This loss is limited to returning the premiums collected on the options. The person still owns his stocks, albeit at a lower value than when the covered call was written.

This is not a foolproof method of investing. There are no guarantees at all associated with it. However, if done properly, it becomes possible to make an income of up to five percent each month in premiums as long as the stocks do not move in value much during the term of the option.

To find out more about covered calls, check out Born To Sell. Born To Sell‘s web site offers additional information about covered call trading.