How to Trade Covered Calls

[Leth]

How to Trade Covered Calls
by Unknown Author

Equity (Stock) Options are one of the most volatile Financial entities and due to their complex nature and ability to lose all of the invested money, it is rarely used by amateur traders. This article is intended to take the mystery and volatility out of Option trading by using relatively safe strategies.

-Calls are options whose market value depends on 1. Price of the underlying 2. Strike price of the call option 3. Time to maturity. There are other things to consider here, but the 3 listed above are the most important. The payoff on a call is P = [Max(Price of Underlying - Srike),0)] (with a negative sign for covered calls- similar payoff has short put option . Covered calls are call options sold on the underlyng you own. If you don't own the underlying you can still sell calls but this will make it naked call selling which is riskier.

-I don't recommend selling covered calls. However, if you feel like you want to do it here's what you need to do: An ideal situation for you would be if you hold on to your stock for a long time and sell covered calls if you think that the stock you own would have a short term pull back. In this scenario you'll simply make some money on covered calls while you wait for your stock to rebound. If you think the company you own has fundamental problems and will drop 30% writing covered calls would still bring in some money, but you'll lose more on the stock. So be careful.

-Don't do it, unless you plan on holding the stock for a long time. Even if the above is true, you might be forced to sell your stock if the stock hits strike price of the call - risk of not capitalizing on the upward movement of the stock.

[Mr. Blonde]

What about buying back the call and netting the difference while capitalizing on the volatility of your underlying? One could perform this scalp several times a day?