September 7, 2015

Cut Down Option Risk With Covered Calls

There are a number of reasons traders employ covered calls. The most obvious is to produce income on stock that is already in your portfolio. Others like the idea of profiting from option premium time decay, but do not like the unlimited risk of writing options uncovered.

A good use of this strategy is for a stock that you might be holding and that you want to keep as a long-term hold, possibly for tax or dividend purposes. You feel that in the current market environment, the stock value is not likely to appreciate, or it might drop some. As a result, you may decide to write covered calls against your existing position.

Alternatively, many traders look for opportunities on options they feel are overvalued and will offer a good return. To enter a covered call position on a stock you do not own, you should simultaneously buy the stock and sell the call. Remember when doing this that the stock may go down in value. In order to exit the position entirely, you would need to buy back the option and sell the stock.

Read more: http://www.investopedia.com/articles/optioninvestor/071201.asp#ixzz3l29km4G4

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