In this very low interest rate environment, high-yield savings accounts, money market funds and CD’s aren’t paying the interest rates they used to. It may be time to look at other avenues to generate more income in your account. One solution? Learn to sell or “write” Covered Calls, an options trading strategy.

What’s a Covered Call?

Writing a covered call means you’re selling someone else the right to purchase a stock you already own, at a specific price within a specific time frame. Because one option contract represents 100 shares of stock, to participate in this strategy, you must own 100 shares of stock for every contract you plan to sell.

As a result of selling, or “writing” the call, you’ll keep the premium when you enter into the transaction – thus generating additional income. Since you already own the stock, you’re covered if the stock price rises above the strike price and the call options are assigned. You’ll simply deliver the stock you already own, with the goal of reaping the additional benefit of the uptick on the stock.

Motivation

The primary motive is to earn premium income, which has the effect of boosting overall returns on the stock and providing a measure of downside protection.

The best candidates for covered calls are the stock owners who are perfectly willing to sell the shares if the stock rises and the calls are assigned.

Stock owners that would be reluctant to part with the shares, especially mid-rally, are not usually candidates for this strategy. Covered calls require close monitoring and a readiness to take quick action if assignment is to be avoided during a sharp rally; even then, there are no guarantees. As with any securities transaction, there are risks.

Profit/Loss

This strategy may be best viewed as one of two things: a partial stock hedge that does not require additional up-front payments, or a good exit strategy for a particular stock. An investor whose main interest is substantial profit potential might not find covered calls very useful.

The potential profit is limited during the life of the option, because the call caps the stock’s upside potential. The main benefit is the effect of the premium income. It lowers the stock’s break even cost on the downside and boosts gains on the upside.

Market Outlook

The covered call writer is looking for a steady or slightly rising stock price for at least the term of the option. This strategy not appropriate for a very bearish or a very bullish investor.

Want to Learn More about Getting Started with Covered Calls?

eOption can help! Click here to view eOption’s instructional video on Writing Covered Calls: https://zoom.us/webinar/register/WN_cRVQNSxhQ5yDoQgsR-WiIw

You’ll also find even more videos on other options strategies at eOption’s Resource Center at: https://www.eoption.com/webinars/webinar-videos-page-1/

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