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Covered calls

Discussion in 'Beginner's Lounge' started by rahulrul210, Aug 23, 2012.

  1. rahulrul210

    rahulrul210

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    I was watching Your money your call and heard one of the panelists constantly mention covered calls, so i did a bit of reading up on it. I just have a few questions like what is the risk? that the stock moves significantly higher and that the buyer exercises the option. Also if i write a covered call my income is the selling of the option, correct?

    thanks for your help
     
  2. wayneL

    wayneL Rotaredom

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    Much here on the topic, do a search to find the threads.
     
  3. ROE

    ROE

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    covered call only good if stock either sideline or going backward and you dont intend to sell the stock
    you lose all the upside swapping for the premium...

    say stock x trades at 10 and u have covered call at strike 11 for 30c premium...
    30c premium is all you get even stock goes to $20 unless you want to close your position at some point before it expire...otherwise comes expiry date anything trades above strike price get assigned...

    also if stock move way up people can chose to exercise early and u have to fork out the stocks...
    and you get to keep all the dividend if dividend get paid before you get assigned...
     
  4. IT Guru

    IT Guru

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    Hi Rahulrul210

    if you own stock you can choose to investigate the covered calls but you really have to know what you are doing. a lot of variables can come into the pricing structure of the Calls eg. volatility, supply and demand. these greatly influence the cost of the call so selling at the right time can greatly increase the income of the strategy but can be tricky.

    if you are looking at an extra income stream from the stock and also to protect it at the same time look at Collars, if bought and sold at the right time they can protect from a correction as well as make money when the stock rises.

    a Collar is Buying a Put close to the stock strike price and Selling a Call above the strike price, the Call pays for the Put. in theory because the stock can only go to Zero the calls are priced higher that the Puts giving you a call that can be a decent distance higher than the strike price so you can make some on the upside but are protected if the stock goes to zero by the put.

    as always please do your homework especially with Options as there are many factors with the pricing model and because they are a derivative they behave very differently to a straight forward stock. I have been studying them for a few years and have the Options bug and love them. it just needs a lot of study to get a good handle on how they work.
     
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