Covered Call Options Strategy: How and Why to Use?

2. Covered call

Covered Call is a strategy used by most savvy traders/investors to maximize the profit potential on the stocks they hold or are looking to invest in.

A covered call involves selling a call option but it’s very different than selling a naked call.

Call is sold against the stocks you already hold.

Before we look into why to trade this strategy, let’s first see how a covered call is formed.

Generally speaking, it involves two legs..

1. You buy/hold 100 qty (or in multiple of 100) of a stock

2. You sell a call against your position (1 call per 100 shares).

And this forms a Covered Call.

But why should you use it? What are the Pros and Cons of it?

Well, while looking to trade a covered call, there are two key points..

1. Buy a stock you think will go up gradually and you are happy to buy and hold the stock.

2. Sell a call against it to reduce your cost basis.

Lets take an example..

XYZ is trading at $100 per share. You are bullish on XYZ and you want to invest in it.

You buy 100 stocks, $100*100= $10,000

You see that the premium of 40 dat DTE is call is approx $5.

You sell a call and below are your numbers..

You paid $10,000 [$100*100] to buy 100 stocks.

You received $500 [$5*100] by selling call.

Your total cost of the trade is $9500 (means $95 per share)

So let’s look what can happen now. There can be 3 scenarios..

1. Stock goes down i.e. $97  >> in that case, your short call will expire worthless and you will keep $500 premium.

2. Stock remains at $100 >> in this case as well, you will keep whole premium

3. Stock goes up i.e $106 >> In this case, short call will be assigned and your stocks will be sold at $100 (strike). But the good news is that, you will still make a profit of $500 (premium you  received)

To summarize it,  A covered call can be a good strategy to generate income when you already own the stock and don’t expect the stock to rise significantly in the near future. So the strategy will help you to generate some extra income on your holding even if stock price in not moving.

If you want to understand this strategy in detail i.e. how to scan/select stocks, which call to sell, how to manage trade and how to make most of it, we can help!

We can provide you live 1-2-1 session to explain everything in detail and easy steps.

Contact: info@bullishoption.com