Wednesday, February 18, 2015

Covered call option strategy

Options have become a popular investment in recent years. You can make more money than stock if you done it the right way. There are many options strategy you can use. 

The basic one is call option and put option. Option is a right to sell or buy an asset at a specific price or what is called strike price.

Besides basic strategy there are also many advanced strategy which is created using several basic options. One of that advance strategy is covered call. This is strategy when you think the stock is bullish but will not move a lot in short term. In that short term you want to make money by selling call option, because when you sell or write option you will receive premiums.
This strategy has limited profit and it will happen when the stock price is at or above call option strike price. Covered call can also bring a lot of loss if the stock drops to 0 but your loss will be offset by the premium you receive when writing call option.
Here's an example so you can understand it more. You bought stock XYZ at $ 100 and write a call option at strike price $ 120 for $ 10 premium. There are 4 final results:
Stock XYZ price is below initial purchase price at $ 80. Your loss from the stock will be $ 20 and it will be offset by the $ 10 premium. So you total loss is $ 10
Stock XYZ price is above initial purchase price but below strike price at $ 110. Total profit from stock and $ 10 premium will be $ 20.
Stock XYZ price is at strike price at $ 120. Total profit from stock and $ 10 premium will be $ 30.
Stock XYZ price is above strike price at $ 130. Your total profit will be the same like when it is at strike price which is $ 30.

Knowing only that strategy is not enough if you want to start option trading. You need to learn more about options trading from books and internet. Another important thing you should remember is trading with virtual trading first then real trading. It is better to lose your money virtually at first than losing your real money.
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