The strategy is using covered calls. Of all the option strategies, covered calls are the safest ones. Also very beginner-friendly while easy to do for anyone.
But this strategy will work best if you are a value investor. And know when your stock is starting to get sold at its intrinsic value or even above that.
But still not quite sure you want to sell it right away. But do not mind if it gets sold for a bit more than the current stock price.
Applying this strategy to pay less for stocks also works. I will explain more later down the road.
- Beginner-friendly & less risky options strategy. Ideal for beginners.
- Easy and simple. Sell a covered call & do nothing.
- Hedge against investment risk.
- You can generate a profit by only holding a stock. Think of this as an extra dividend.
- You can still close it and sell the stock if you want to.
- Limits upside. Force selling the stock you own if it reaches a strike price.
- Not suitable for cheap stocks that can drastically rise in value because of this.
- No vast profits at a time. Since you often get paid a small amount.
What Is a Covered Call
A promise that someone can buy your stock at a strike price. But you know of this strike price beforehand.
You still own the stock. But if it rises to the strike price. The one who bought your covered call has the right to buy it for that price. Always the right.
If the stock goes down in value, you still lose money. But lose less since you get paid for the coverage call anyways.
Let's say you have a stock that's worth $100. Now you sell a covered call for $2 that will expire in three months at 110.
If the stock is worth $120 in 3 months, the buyer bought your share for 110. You got forced to sell to the guy who bought your covered call. When it's worth way more.
So you have a total of $112, a profit of $12. If you would not sell a covered call, your profit would have been 120-100 = $20. And you have lost your stock since you promised to sell it at that price.
If your stock dropped to $80 it would have gotten to $82. And you have lost $2 less. Thanks to the covered call, you still own the stock.
If your stock hasn't moved a bit in three months, you have ended up with a profit of $2. And you still own the stock.
And you can do this as often as possible. If, of course, there is a buyer.
Covered Call Strategy
This strategy has its risk like any other does. But applied in the right way can lead to some extra gains.
One thing is it's hard to lose money when taking profits. This strategy should be low risk. But it limits the upside. More suitable for stable and blue chip companies.
Think of this as if you have a set price you want to sell a stock for anyways. Then applying this strategy can be a good option.
A sudden or overall great return can lead to a stock becoming overpriced. And then this strategy can apply great because of that.
Now I'm not thinking super overpriced since you still don't want it to be able to significantly drop in price. Then selling can be a better option.
Covered Call Risks
I may have covered the risks before, but here they are again and some more risks.
Force you to sell if it reaches the strike price. You sold the promise that the buyer can buy at that strike price. That's the service you selling.
On the occasion that you sell a stock with a covered call, you lose the covered call.
Be careful if there's too high of a premium. It can be priced so high because of a valid reason.
Buy-Write: Pay Less When Buying an Asset
If you want to buy a stock or another asset, you can still apply call options to create an extra pillow for yourself.
This strategy is also straightforward. You buy the stock and, at the same time buy a covered call for more than the price you paid for it.
If you buy a stock for $60, then later sell a call option for $63 for $2.
That means if it doesn't rise above $63, then you only paid $58 for it. And percentage wise that's 3% less.
If the stock rises to $63, the buyer can force you to sell it. And you may lose a bit. But your gain is still $5 or percentage-wise 8%.
A covered call strategy is a solid strategy if you have or want to own a stock. That you think is about right priced.
And doesn't mind selling it, if it rises above a fixed covered call strike price.
The return is small but consistent and gives us a little hedge. You get paid for the covered call as sling as you don't sell your stock.