Back To Main | Back To Previous

Covered Call

Profile Version / Simplified Version / Comprehensive Version



Purpose Of Covered Call
1. To create a monthly residual income stream from your stock
2. To create extra profit when a stock goes up or stays stagnant
3. To reduce loss on a falling stock


Expectations Of Covered Call
Up or Stagnant


How To Use Covered Call?
Write (sell to open) 1 contract of nearest out of the money or at the money call option for every 100 shares you own.

Buy 100 Shares + Sell 1 Out Of The Money (OTM) or At The Money (ATM) Call Option
Covered Call Risk Graph Learn How To Read This Chart


Profit Potential of Covered Call :
Maximum profit occurs when the stock expires at the strike price of the short call options.


Profit Calculation of Covered Call:
1. If stocks are not assigned (called off) at expiration:

Profit = (value gained in stock + initial price of short call options) / initial value of underlying stock

2. If stocks are assigned (called off) at expiration:

Profit = ((strike price of short call options - initial value of underlying stock) + initial price of short call options) / initial value of underlying stock

3. If stocks have dropped in value at expiration:

Profit = (initial price of short call options - (initial stock price - stock price at expiration)) / initial value of underlying stock



Risk / Reward of Covered Call:

Upside Maximum Profit: Limited

Maximum Loss: Unlimited


Break Even Point of Covered Call:
There are 2 ways to look at breakeven point for a covered call.

1. As the Covered Call profits mainly from the decay of the short out of the money call options, the main way to look at breakeven is the number of days it takes for the decay of the short call options covers its bid/ask spread.

Stagnant Breakeven point = Bid ask spread / theta


2. The lower breakeven point to find out how much the underlying stock can fall before you start making real losses to your account value.

Lower Breakeven point = Initial Value of Short Call Options - Initial Value of underlying stock

explosive option trading mentor Personal Option Trading Mentor
Find Out How My Students Make Over 87% Profit Monthly,
Confidently, Trading Options In The US Market!


Advantages Of Covered Call:

  • Able to profit even if your stock stays stagnant.

  • Able to offset losses if your stock drops in value.


    Disadvantages Of Covered Call:

  • You must continue to hold your stocks if you want to keep the short call options.

  • You can lose your stocks if it rises beyond the strike price of the short call options through assignment at expiration.


    Recommended!Trade Covered Calls With Best Options Broker, OptionsXpress!




    High Yield Covered Calls High Yield Covered Calls Make Explosive Profits From Covered Calls!
    Perfect for all Options Traders! Original eBook by Optiontradingpedia.com!
    This eBook Covers:
    :: The Secret to looking for the PERFECT stock for Covered Calls
    :: The number of ways to write Covered Calls
    :: The two ways of measuring Covered Call returns
    :: Most Importantly, how to automatically look for high yield Covered Call opportunities to make up to 25% a month!
    This $29.90 eBook teaches you all these and more!

    Average Reader Rating : 4.5 / 5
    Optiontradingpedia.com is a Masters 'O' Equity company and uses Masters 'O' Equity payment gateway



    cool feature! Don't Know If This Is The Right Option Strategy For You? Try our Option Strategy Selector!





    Continue your journey of discovery...
    Click Me For Content Index
    Click Above For Content Index

    Questions? | Suggestions?

    What Is A Butterfly Spread?
    What Is A Condor Spread?
    What Is Theta & Other Option Greeks?
    What Is A Short Straddle?
    What Is A Short Strangle?
    What Is A Covered Put?
    What Is A Collar?
    What Is Iron Condor Spread?
    What Is An Iron Butterfly Spread?
    Back To Strategies Page
    Stock Options
    Options Trading


    Back To Main | Go To Option Trader's HQ

     

  • Javascript Tree Menu

    Keep in touch with our updates through RSS...NOW! Follow Optiontradingpedia.com on Twitter

    Our Sponsors


    Important Disclaimer: Options involve risk and are not suitable for all investors. Data and information is provided for informational purposes only, and is not intended for trading purposes. Neither optiontradingpedia.com, mastersoequity.com nor any of its data or content providers shall be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon. Data is deemed accurate but is not warranted or guaranteed. optiontradinpedia.com and mastersoequity.com are not a registered broker-dealer and does not endorse or recommend the services of any brokerage company. The brokerage company you select is solely responsible for its services to you. By accessing, viewing, or using this site in any way, you agree to be bound by the above conditions and disclaimers found on this site.

    Copyright Warning: All contents and information presented here in optiontradingpedia.com are property of Optiontradingpedia.com and are not to be copied, redistributed or downloaded in any ways unless in accordance with our quoting policy. We have a comprehensive system to detect plagiarism and will take legal action against any individuals, websites or companies involved. We Take Our Copyright VERY Seriously!