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Covered Call is a strategy where you sell the underlying security and at the same time you buy the covered call option on the same underlying security. You are short selling the underlying security and buying a covered call option on the same underlying security to generate income from increase in stock price.
When you are short selling an underlying security, if there is any decline in its price, your loss is limited as you have already sold off your position in the underlying stock but at the same time you have purchased a call option that expires at some point in future (let's say one year).
But if there is any increase in stock price of that particular underlying security, your profit will be maximized as you have sold off your position while simultaneously purchasing another call option that expires one year later. This strategy of course works only when your assumptions regarding risk of loss are correct and risk of profit is unlimited so as to get maximum benefit from this strategy. In most cases it would be unrealistic to think that your assumptions about risks and rewards would always be correct but it should be an assumption which should always help you to maximize your profits.
Covered Calls are used by a person to sell their own stocks. It's a good way to make money, but you have to be careful because you may lose your investment, or you may get back less than what you put in. But it's a good way to make money and be a little risk-free at the same time.
What is the basic concept?
A person puts money into a call spread. When they sell the call, the money is returned to them, but if the stock goes up more than the call price, then they can make money. But if the stock goes down more than their call price, then they lose their money. This way, a person can make money even when their stocks go down and be safe from losing too much of their money.
What are the benefits from Covered Call?
Some investors decide to sell put options regularly in order to get the most cash income from them. Also you can make money even when your stock goes down. Likewise, you can also make money even if your stock doesn't go up at all. You can also make money if the stock goes up more than the call price. So even though your stock may not go up that much or at all and may not give you any income at all, you will still get some income because of your covered calls.
How does it work?
When you buy a put spread, you have to pay for it whether or not you want to sell it. But when you sell a covered call, you get paid even if your stock doesn't go up that much. So if your stock doesn't go up that much or at all, then you will still get paid back some of what you put in because of your covered calls. So even though your stock may not go up that much or at all and may not give you any income at all, you will still get some income because of your covered calls.
What are the Pros and Cons?
Pros: You can make money on your stocks by selling them. If you buy stocks with good potential, you can sell them later at a higher price. You can protect your profit by selling a covered call against it. This is done by selling call options. When you sell these call options, the stock has to go up at least 10% before you will get the full amount of money back.
So this is a form of protection against loss. If the stock doesn't go up, you will lose money in the end. This is called negative delta which means that the option loses money if there is no movement in the stock price. But if it does go up, then it's not as bad because you don't lose much, but when it does go down again, you will lose even more because the options will have dropped too low already to give any profit back to you if they drop again below 10%. You will only get what was left after paying for them when they were sold in order to be sold for that price when they are called away from their current owner.
Cons: You have to pay commission fees for each trade (the same amount as buying the stock), and you will have to pay fees for each call option you sell. It's usually better to buy a call option instead, because it is less money, and you can get a better price than selling one. Also, when the stock drops, your position will also drop too low to be worth buying again if you still want to make money.
Covered Calls can be a great way to generate income from the stock you already own and increase in its price. Covered calls have been used by both professional traders and individual investors alike as a profitable investment tool. This strategy works best when the underlying stock has been in a downtrend for some time. While short selling an underlying stock can also be used as a form of leveraged trading, covered call is more of a “hedging” technique, where you are attempting to hedge your exposure to an underlying security by purchasing another option which expires at some point in future.