Options 101: Covered-Call Writing
Reduce risk, increase profit.
An introduction strategy selection was recently posted in which I suggested a few of the methods I use. Call writing is covered at the top of the list.
When you write (sell) a call option, you accept the obligation to sell 100 shares at the option's strike price. You may never be required to sell those shares, but as long as that option is outstanding (you haven't repurchased it and it hasn't expired) that obligation remains intact.
When you are "covered" it means that you already own the shares that you're under obligation to sell. (If you don't own the shares, your option position is "naked," and if you must sell the shares, it would be a short sale.)
Only the option owner has the right to decide if he/she wants to exercise the option to buy your shares. You, as the option writer, have no rights.
When investors first hear about the idea of covered calls, they're often surprised at how much "free" money there is to be made, and thus, are eager to adopt this investing method. It's not that easy to make money, and it certainly isn't "free." But, this method can be considerably less risky than owning stock outright - as in buy-and-hold. There's still risk of loss when the share price declines - and profits are limited (you cannot sell stock above the strike price). This strategy isn' suitable if you're someone who must achieve the best possible result with each investment because when the market surges, you may be dissatisfied with the profits.
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