Basically, equity covered calls writing for income involves a popular options trading strategy involving the both stock and call options. It involves an investor buying stock and then selling calls over that stock. Its prime benefit is the incremental revenue generated via the options sale.
The sale of those call options opens the investor to the risk that the options will be exercised and the investor will be required to sell the shares at the stipulated price. The investor already owning shares underlying the call options mitigates that risk. Ownership of the underlying shares is said to cover the call options.
The writer of the calls uses the long stock position to open a short call position. The intention is to generate cash from the sale of the calls not from the sale of the underlying stock as well. However, if the stock price increases so that the calls are exercised, the stock investor simply transfers ownership of that stock at the strike price.
The strategy is a buy-write or buy-sell combination. An investor buys stock and simultaneously writes (that is, sells) call options knowing the stock mitigates the call risk. This trading technique is generally based on an investor having a neutral-to-negative outlook regarding the stock price.
An example will illustrate these points. A stock investor buys one hundred shares in ZZZ Company at ten dollars per share. The investor believes the price of this stock is likely to remain flat, or maybe even fall, during the next few months.
Following purchase of the stock, the investor sells one hundred ZZZ Company call options for fifty cents per option. The call options have a ten dollar strike price and four month expiry. This sale produces an income of fifty dollars for the investor (ignoring commissions).
The investor is long 100 ZZZ stock and short 100 ZZZ call options. Three outcomes now exist regarding the ZZZ stock price during the next four months. It can remain constant ten dollars, rise above ten dollars or fall below ten dollars.
In the first and second stock price scenarios, the call options mature at expiry without the owner making a call for the stock. In both outcomes, the stock investor continues owning the one hundred ZZZ shares. The investor also gains fifty dollars of option sale income.
In the third scenario, an exercise of the options is triggered if the stock price rises above six dollars and twenty cents. In that case, our stock investor is obliged to sell ten thousand XXX shares at six dollars each. Total income for the stock investor is two thousand dollars from the sale of the options plus sixty thousand dollars from the stock sale.
In conclusion, covered calls writing for income is a low risk technique for generating some cash revenue from share ownership. Writing call options does limit the upside an investor can reap from the sale of the shares if the options are exercised. However, this limit can be determined by the share owner investor by selecting an appropriate option strike price.
The sale of those call options opens the investor to the risk that the options will be exercised and the investor will be required to sell the shares at the stipulated price. The investor already owning shares underlying the call options mitigates that risk. Ownership of the underlying shares is said to cover the call options.
The writer of the calls uses the long stock position to open a short call position. The intention is to generate cash from the sale of the calls not from the sale of the underlying stock as well. However, if the stock price increases so that the calls are exercised, the stock investor simply transfers ownership of that stock at the strike price.
The strategy is a buy-write or buy-sell combination. An investor buys stock and simultaneously writes (that is, sells) call options knowing the stock mitigates the call risk. This trading technique is generally based on an investor having a neutral-to-negative outlook regarding the stock price.
An example will illustrate these points. A stock investor buys one hundred shares in ZZZ Company at ten dollars per share. The investor believes the price of this stock is likely to remain flat, or maybe even fall, during the next few months.
Following purchase of the stock, the investor sells one hundred ZZZ Company call options for fifty cents per option. The call options have a ten dollar strike price and four month expiry. This sale produces an income of fifty dollars for the investor (ignoring commissions).
The investor is long 100 ZZZ stock and short 100 ZZZ call options. Three outcomes now exist regarding the ZZZ stock price during the next four months. It can remain constant ten dollars, rise above ten dollars or fall below ten dollars.
In the first and second stock price scenarios, the call options mature at expiry without the owner making a call for the stock. In both outcomes, the stock investor continues owning the one hundred ZZZ shares. The investor also gains fifty dollars of option sale income.
In the third scenario, an exercise of the options is triggered if the stock price rises above six dollars and twenty cents. In that case, our stock investor is obliged to sell ten thousand XXX shares at six dollars each. Total income for the stock investor is two thousand dollars from the sale of the options plus sixty thousand dollars from the stock sale.
In conclusion, covered calls writing for income is a low risk technique for generating some cash revenue from share ownership. Writing call options does limit the upside an investor can reap from the sale of the shares if the options are exercised. However, this limit can be determined by the share owner investor by selecting an appropriate option strike price.
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Investors, find out how you can easy generate cash revenue from share ownership with covered calls. You can also get details about the advantages of covered calls writing as well as tips and advice on how to use married puts.
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