Why I Love Writing Covered Calls
Writing covered calls is one of the most powerful strategies to increase your return in the stock market. It is a strategy that I utilize very often because it works.
So what actually happens when you decide to sell a covered call? Basically when you sell a call on a stock that you own you get some money up front and take up the obligation to sell your stock at a certain strike price on or before a specific expiration date.
For example say you own a stock trading at $42 and sell the $45 call on it for $4, you would make the $4 as soon as you enter, however if you are called out you will have to sell the stock at $45.
So if the stock shoots up to say $50 you will be forced to sell it at $45 missing out on some of that move. This is the risk that you take, by selling covered calls you are risking missing some of the potential profit should the stock shoot up.
So why so so many people love this trading strategy? Well, for one if you do not believe the stock will make a large move to the upside in the near future it could be a great way to get some extra cash flow. It could also help to ease the pain if your stock makes a large downward move in the short term.
It is even a great way to exit the position. If you are happy selling it at $42 and want you make some extra cash before you get out you could always sell the $40 call and make say $6. You would be called out at $40 if the stock stayed above it, but you would have made $6 on the call making it much more profitable than simply selling the stock.
In the end covered calls can work out great, especially if you combine them with dividend paying stocks that also have strong fundamentals.
