There is a potential steady profit from seemingly frozen stock assets through writing covered calls. It is easy if one knows the basic idea behind it. It is the act of selling an option. A call option is a contract that gives a buyer right but without the obligation to buy shares at a specified price within the specified date. It functions as a security and is binding with stipulated terms and properties. An option writer makes a limited income and involves some risk.
As an illustration, one car buyer chanced upon a particular vintage car and offered to buy it. There are other collectors who wants to buy it. Since he doesn't have the money until the next month, he makes a deal with the owner to stall an offer. He promises to buy it next month at $10,000, a price a little higher than the current market value. To give strength to his promise, he pays cash now for a total of $1,000. If by next month he fails to pay $10,000, the offer is off but the owner keeps the $1,000. Or if the buyer is able to pay $10,000, the owner gets a total of $11,000 from the deal.
The number one reason why this strategy is being employed is obviously to make money from stocks that are already owned but seems to be stagnant or may even have a potential to dip a bit. With only a minimum of 100 shares, one can already trade an option. That is when he thinks that after much deliberation studying the market environment, he is in the winning position.
The commonly encountered terms when in this strategy are mentioned here. First is the strike price, this is the cost of the share when it is sold. During the entire duration of the contract, the market price of the stock is being eyed because if it step above the strike price, the conditions for buyer's right to be exercised is satisfied.
The premium price is the cost of the option. Factors that determine this price are the current stock price, the strike price, time value or the remaining time until expiry and the volatility. It is important to study the market trend.
To begin trading, contact the current stock brokerage firm one is in, they may be able to accommodate writing an option against his own stock. Otherwise, it may be necessary to transfer ones stocks to another brokerage firm that does. Always inquire about the procedures and the fees beforehand. If they give it, as some advise to good deals.
Be ready with a stock that is sale-able for call option. One Call option is one hundred shares. Decide how many options that must be placed in the offer with regards to the number of shares owned. Name the premium and the strike price. The former is the price of the option and the latter is the price of the shares in case it is bought. Keep in mind that the goal is to not be able to sell and therefore keep the asset and keep the premium. To do this, the strike price must stay above the market price during the duration of the contract.
Writing covered calls is a wise investment move done by both experienced and new traders. It has a limited risk and brokerage firms are lenient as to the use of this strategy. Nevertheless, it needs to have approval from them.
As an illustration, one car buyer chanced upon a particular vintage car and offered to buy it. There are other collectors who wants to buy it. Since he doesn't have the money until the next month, he makes a deal with the owner to stall an offer. He promises to buy it next month at $10,000, a price a little higher than the current market value. To give strength to his promise, he pays cash now for a total of $1,000. If by next month he fails to pay $10,000, the offer is off but the owner keeps the $1,000. Or if the buyer is able to pay $10,000, the owner gets a total of $11,000 from the deal.
The number one reason why this strategy is being employed is obviously to make money from stocks that are already owned but seems to be stagnant or may even have a potential to dip a bit. With only a minimum of 100 shares, one can already trade an option. That is when he thinks that after much deliberation studying the market environment, he is in the winning position.
The commonly encountered terms when in this strategy are mentioned here. First is the strike price, this is the cost of the share when it is sold. During the entire duration of the contract, the market price of the stock is being eyed because if it step above the strike price, the conditions for buyer's right to be exercised is satisfied.
The premium price is the cost of the option. Factors that determine this price are the current stock price, the strike price, time value or the remaining time until expiry and the volatility. It is important to study the market trend.
To begin trading, contact the current stock brokerage firm one is in, they may be able to accommodate writing an option against his own stock. Otherwise, it may be necessary to transfer ones stocks to another brokerage firm that does. Always inquire about the procedures and the fees beforehand. If they give it, as some advise to good deals.
Be ready with a stock that is sale-able for call option. One Call option is one hundred shares. Decide how many options that must be placed in the offer with regards to the number of shares owned. Name the premium and the strike price. The former is the price of the option and the latter is the price of the shares in case it is bought. Keep in mind that the goal is to not be able to sell and therefore keep the asset and keep the premium. To do this, the strike price must stay above the market price during the duration of the contract.
Writing covered calls is a wise investment move done by both experienced and new traders. It has a limited risk and brokerage firms are lenient as to the use of this strategy. Nevertheless, it needs to have approval from them.
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