Covered call option writing analysis

Covered Call Writing Definitions A call option may be defined as a contract that gives its holder a right, but not an obligation, to buy an underlying stock at a pre-determined price called the strike price. If the call writer does not own the underlying stock, writing a call option with a simultaneous purchase of the underlying stock is also considered as covered call writing. It loses its value as the time passes by.

Covered call option writing analysis

The formula for calculating maximum profit is given below: However, this risk is no different from that which the typical stockowner is exposed to. The formula for calculating loss is given below: It is interesting to note that the buyer of the call option in this case has a net profit of zero even though the stock had gone up by 7 points.

Profiting from Covered Calls

While we have covered the use of this strategy with reference to stock options, the covered call otm is equally applicable using ETF options, index options as well as options on futures. However, for active traders, commissions can eat up a sizable portion of their profits in the long run.

If you trade options actively, it is wise to look for a low commissions broker.

covered call option writing analysis

Traders who trade large number of contracts in each trade should check out OptionsHouse. Summary Overall, writing out-of-the-money covered calls is an excellent strategy to use if you are mildly bullish toward the underlying stock as it allows you to earn a premium which also acts as a cushion should the stock price go down.

So if you are planning to hold on to the shares anyway and have a target selling price in mind that is not too far off, you should write a covered call. Similar Strategies The following strategies are similar to the covered call otm in that they are also bullish strategies that have limited profit potential and unlimited risk.Covered Call Writing.

Covered Call Options

Definitions. A call option may be defined as a contract that gives its holder a right, but not an obligation, to buy an underlying stock at a pre-determined price called the strike price. Posted on November 10, by Alan Ellman in Covered Call Exit Strategies, Exit Strategies, Investment Basics, Option Trading Basics, Stock Investing, Stock Option Strategies, Technical Analysis Technical analysis is one of the critical tools available to us in selecting the best stocks for our option-selling strategies.

Covered Call Writing Calculator Calculate the rate of return in your cash or margin buy write positions This calculator will automatically calculate the date of expiration, assuming the expiration date is on the third Friday of the month.

What is a 'Covered Call'

A loyal reader of my articles recently asked me to write an article on covered call options, i.e., call options of a stock that are secured by the related shares of the stock in the portfolio. By comparison, the covered call writer who is glad to liquidate the stock at the strike price does best if the call is assigned -- the earlier, the better.

Unfortunately, in general it is not optimal to exercise a call option until the last day before expiration. The covered call calculator and 20 minute delayed options quotes are provided by IVolatility, and NOT BY OCC. OCC makes no representation as to the timeliness, accuracy or validity of the information and this information should not be construed as a recommendation to purchase or sell a security, or to provide investment advice.

Why You Should Not Sell Covered Call Options | Seeking Alpha