Covered Call – One of Income Strategies
The Covered Call is the most basic of income strategies, yet it is also highly effective and can be used by novices and experts alike.
The concept is that in owning the stock, you then sell an Out of the Money (stock< call strike price) call option on a monthly basis as a means of collecting rent ( a a dividend) while you own the stock. If the stock rises above the call strike, you’ll be exercised, and the stock will be sold and you make a profit anyway. If the stock remains static, then you’re better off becaouse you collected the call premium. If the stock falls, you have the cushion of the call premium you collected.
Buy stock + Sell OTM call = Covered Call
Maximum risk [Stock price paid-call premium]
Maximum Reward [Call strike-stock price paid]+ call premium
Breakeven [Stock price paid-call premium]
With a Covered Call, your outlook is neutral to bullish. You expect a steady rise. To buy ( or own) a stock for the medium or long term with the aim of capturing monthly income by selling calls every months. This is like collecting rent for holding the stock and will have the effect of lower your cost basis of holding the stock.
The advantages of Covered Call are:
-Generate monthly income;
-lower risk than simply owning the stock;
- Can profit from rangeboundstocks.
The disadvantages are:
- Capped upside if the stock rises;
-Upcapped downside if the stock falls, cushioned only by the callpremium received.