Covered Calls Frequently Asked Questions
There are a few new terms and concepts to learn when you first begin learning about covered calls. They’re not that difficult, and covered calls are similar in many ways to other investment concepts. It is important to find good sources of information and to understand as much as you can before investing your money. Covered calls can be a good money making source, but they are not a fast path to instant riches. If you are looking to become wealthy overnight, then this is probably not the right strategy for you. But if you are interested in a reliable way to earn recurring monthly income, then covered calls make a good choice.
A few commonly asked questions among new covered call investors:
What exactly are covered calls anyway?
Also commonly called a “buy-write” by some investors, a covered call is simply when an investor thinks that a stock has a good long term outlook but expects that the short term will stay relatively stable and trade within a few dollars of it’s current price. In this situation, the investor will then sell call options on the stock while simultaneously holding a long position on the stock. This is in the hopes of generating some income on the premium.
What do “long” and “short” mean?
When you own a security, then you are considered to be “long” and when you are “short” a security, it simply means you are selling it without actually owning it. You will then have to purchase it at some time in the future.
Ok. But how do I make money?
You sell call options to buyers that allow them to purchase at a predetermined price, and they pay you a “premium” that is yours to keep whether the option is exercised or not. This guarantees you premiums regardless of the outcome, and creates income that you can count on.
When should I sell call options?
You can sell call options against your stock at any time. In fact, you could do it every month if you want to (and generate recurring monthly income). You would not want to do it if you expect the stock to shoot up in value in the very near term. By selling the option you are putting a cap on your upside for the stock (in exchange for the option premium you receive). The best case, for you the option seller, is to have your stock stay the same between the time you sell it and its expiration. That way you collect the option premium, break even on the stock, and can do it again the following month.
Investing in covered calls is not difficult. It is the most common options-based investment strategy (Schwab says 84% of their option enabled accounts will do covered calls). Having a good covered call screener at your side will save you time (much better than a manual spreadsheet). If you’re not selling calls against stocks you already own then you’re leaving money on the table each month.
To find out more call option tips take a look at this site.
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