27 June 2022 10:31

Covered calls: How to handle this trade?

A covered call is used when an investor sells call options against stock they already own or have bought for the purpose of such a transaction. By selling the call option, you’re giving the buyer of the call option the right to buy the underlying shares at a given price and a given time.

How do you trade with covered calls?

To enter a covered call position on a stock that you do not own, you should simultaneously buy the stock (or already own it) and sell the call. Remember when doing this that the stock may go down in value. While the option risk is limited by owning the stock, there is still risk in owning the stock directly.

How do you handle a covered call position?

There are three ways to manage a covered call: no management, roll the option, or close the trade. We typically do not manage a covered call if the short call option still has significant extrinsic value or if the short call is OTM with little time till expiration.

Is trading covered calls profitable?

Profiting from Covered Calls



A covered call is therefore most profitable if the stock moves up to the strike price, generating profit from the long stock position, while the call that was sold expires worthless, allowing the call writer to collect the entire premium from its sale.

Can you lose money with covered calls?

The maximum loss on a covered call strategy is limited to the price paid for the asset, minus the option premium received. The maximum profit on a covered call strategy is limited to the strike price of the short call option, less the purchase price of the underlying stock, plus the premium received.

Can I sell my shares if I sold a covered call?

You buy a long call. You write, short, or sell a covered call – it all means the same thing. You can also buy a long call on pretty much any stock, while you can only sell a covered call on a stock you already own. Otherwise, the call wouldn’t be covered – it’d be naked.

What is the downside to covered calls?

There are two risks to the covered call strategy. The real risk of losing money if the stock price declines below the breakeven point. The breakeven point is the purchase price of the stock minus the option premium received. As with any strategy that involves stock ownership, there is substantial risk.

Do covered calls always get assigned?

If an options buyer chooses to exercise their option, the Options Clearing Corporation receives an exercise notice, which begins the process of assignment. Assignment is random, and if you have a short options position, you may be assigned by your brokerage firm.

When should you close covered calls?

There are essentially two primary situations in which it may make sense to close out a profitable covered call trade early.

  1. When the Stock is Vulnerable to a Decline. …
  2. When You Have Better Opportunities for Capital.


Should I trade covered calls?

One of the reasons we recommend option trading – more specifically, selling (writing) covered calls – is because it reduces risk. It’s possible to profit whether stocks are going up, down or sideways, and you have the flexibility to cut losses, protect your capital and control your stock without a huge cash investment.

How far out should I sell covered calls?

Consider 30-45 days in the future as a starting point, but use your judgment. You want to look for a date that provides an acceptable premium for selling the call option at your chosen strike price. As a general rule of thumb, some investors think about 2% of the stock value is an acceptable premium to look for.

What happens if I let a covered call expire?

To create a covered call, you short an OTM call against stock you own. If it expires OTM, you keep the stock and maybe sell another call in a further-out expiration. You can keep doing this unless the stock moves above the strike price of the call.

Do covered calls Outperform Buy and hold?

According to Optionize.net founder Derek Tomczyk, an S&P 500 covered call strategy (using SPY) should outperform a buy-and-hold strategy 75-90% of the time. However, 10-25% of the time, the potential lost appreciation can be great, thereby favoring the buy-and-hold investor.

Can I sell covered calls every week?

Income Potential



You could sell one monthly covered call or four weekly covered calls over the same timeframe. Since weekly covered calls have a faster time decay, all other factors being equal, you could generate a little more income from weekly covered calls compared to monthly covered calls.

Is covered call bullish or bearish?

What are covered calls? Covered calls are a combination of a stock and option position. Specifically, it is long stock with a call sold against the stock, which “covers” the position. Covered calls are bullish on the stock and bearish volatility.

Can I buy back my covered call?

When you sell a call option, whether covered or uncovered, you create an open position. Options are traded in a double auction market, with a bid and asked price. Although there is a specific buyer and a specific seller for each option, there is no way to buy back the original option that you sold.

Do you have to own 100 shares to sell a call?

When writing a covered call, you’re selling someone else the right to purchase a stock that you already own, at a specific price, within a specific time frame. Since a single option contract usually represents100 shares, to run this strategy, you must own at least 100 shares for every call contract you plan to sell.

How do you hedge a covered call?

Covered calls can be hedged by rolling down the short call option as price decreases. To roll down the option, repurchase the short call (for less money than it was sold) and resell a call option closer to the stock price.

How do I sell a covered call without stock?

In this iteration of the covered call strategy, instead of buying 100 shares of stock and then selling a call option, the trader simply purchases a longer dated (and typically lower strike price) call option in place of the stock position and buys more options than he sells.

How do you handle a poor man’s covered call?

Choose stocks that have low or decreasing implied volatility (e.g., a low beta). Avoid companies that have near-term earnings reports or other events that could increase volatility. Choose long in-the-money call options with an extrinsic value equal to or lower than that of the short option.