Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The 6-Week Options Trading Kickstarter: Covered Calls

By

Steve Smith breaks down a popular options strategy.

PrintPRINT
Repeatable Offense?

Brokers love to promote covered calls as a relatively conservative strategy, and investors who claim they would never sell naked options (meaning being short an option with no offsetting stock position) are all too willing to buy into that notion. But the reality is that the risk/reward of a covered call is no different than selling a comparable put short.

Let's go back to IBM. The September at-the-money (or ATM) $200 call can be sold for $4. This would give you a downside breakeven point of $196, which is calculated as the stock purchase price minus the premium sold ($200 - $4= $196) and would have a maximum profit of $4 for an effective sale price of $204. That is the strike price plus the premium sold ($200 + $4 =204).

By comparison, the $200 put can be sold for $4.90, which means your effective purchase price if you were assigned the stock would be $195.10, which is the strike price minus the premium collected ($200 - $4.90 = $195.10) while the maximum profit is $4.90, which is the amount of premium collected.

However, when we account for dividends, the risk/reward of a covered call and naked short put is exactly the same. Adding the $0.90 to the $4 equals $4.90 -- the same amount.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE