{"id":17113,"date":"2023-01-22T09:46:00","date_gmt":"2023-01-22T09:46:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=17113"},"modified":"2023-01-23T08:47:44","modified_gmt":"2023-01-23T08:47:44","slug":"covered-call-strategies","status":"publish","type":"post","link":"https:\/\/businessyield.com\/business-strategies\/covered-call-strategies\/","title":{"rendered":"COVERED CALL STRATEGY: 2023 Best 7+ Strategies To Scale Any Trading Condition (Updated)","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"

Covered call strategies are one aspect of the options trading that can never be undermined. New investors need to be abreast with advanced covered call strategy, cover call strategy examples, However, this article will guide you on all of these listed above, not forgetting also best-covered call strategy for income.<\/p>

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Image Credit: Investormint<\/figcaption><\/figure>

Before we dive into covered call strategies, lets take a brief look at what is covered call. <\/p>

Covered Call<\/span><\/h2>

A covered call is a financial transaction in which the trader selling call options owns an equivalent sum of the underlying security. To execute this, an investor holding a long position in an asset then writes (sells) call options on that same asset to produce an income stream.<\/p>

A covered call is a risk management and an options strategy. It includes holding a lasting position in the underlying asset, such as stock. It also sells a call option on the underlying asset. Investors commonly employ the strategy who believe that the underlying asset will undergo only insignificant price changes.<\/p>

Additionally, A covered call relates to a financial transaction in which the investor selling call options owns an equivalent amount of the underlying security. To do this, an investor holding a long position in an asset will write (sell) call options on that same asset to produce an income stream.<\/p>

C<\/strong>overed Call Strategies<\/span><\/h2>

Selling the call obligates investors to sell stock they already own at a strike price if the option is assigned. Some traders will run this strategy after they have already seen pleasant gains on the stock. Often, they will sell out-of-the-money calls, so if the stock price goes up, they are not reluctant to part with the stock and take the profit.<\/p>

If investors buy stock and sell the calls at the same time, it\u2019s called a \u201dBuy \/ Write.\u201d Most traders use a Buy \/ Write as a means of reducing the cost basis of a stock they have just bought.<\/p>

However, the call that is sold is basically out of the money (OTM), when an option\u2019s strike price is higher than the market price of the underlying asset. This profit can be made on both the option contract sale and the stock if the stock price stays below the\u00a0price.<\/p>

Are Covered Calls Profitable?<\/h2>

Be aware that the covered call has a predetermined profit ceiling, which is reached only if the stock price is above the call’s strike price at expiration. The $40 mark is used as an illustration here. As the share price falls below the strike price, the profit begins to shrink until it reaches the breakeven point.<\/p>

Can I Lose Money Selling Covered Calls?<\/h2>

If the stock price drops below the breakeven point, the covered call investor incurs a loss. The opportunity risk is present if the stock price rises above the effective selling price of the covered call.<\/p>

What Is Better Than Covered Calls?<\/h2>

The potential gain in a naked call strategy is limited to the premium collected. Investors who take on naked call positions typically have a neutral to bearish outlook on the underlying asset for the near future. An investor can protect their stock from potential losses and increase their income by selling covered calls.<\/p>

Covered Call Strategy Example<\/strong><\/span><\/h2>

The covered call strategy has so many examples. However, let\u2019s take a look at this example given below. <\/p>

An investor owns shares of a hypothetical company WNE. They like its long-term outlooks as well as its share price. However, they feel that the stock will likely trade relatively low in the shorter term, perhaps within a couple of dollars of its current price of $250.<\/p>

If they sell a call option on WNE with a strike price of $270, they earn the bonus from the option sale but, for the duration of the option, cap their upside on the stock to $270. Assume the premium they receive for writing a three-month call option is $0.75 ($75 per contract or 100 shares).<\/p>

One of two cases will play out:<\/p>