Selling Covered Calls
Selling calls on your stocks can greatly increase your returns in the stock market. Most investors don’t utilize this strategy to make the most off of their investments.
Then what are covered calls? Well selling covered calls allows an investor to make money up front in exchange for being obligated to sell their stock at a specific price on or before a specific date in the near future.
For example say you own a stock that is priced at $83 and want to sell the $85 call on it for $3. You would get $3 up front. There is however one big disadvantage to selling a call, it does limit the amount of money you could potentially make off of the investment.
So, if the stock shoots up to say $99 then you would be forced to sell it at $85 and miss a good chunk of the profit.
This means that the amount you could potentially make off of a stock is limited by selling the calls. However by selling calls you can make money now and insure that you will make money even if the stock stays sideways. Covered calls can also relieve some of the pain if the stock goes down.
One example of this would be if the stock actually went down to $80 instead of going up. Because the investor paid $83 for the stock they would lose $3, however because they made $3 on the call option they would actually break even. It can be a nice thing to do if you believe the stock is due to have a pullback.
In conclusion selling covered calls has a huge potential, especially if you invest into fundamentally strong companies with great dividend paying stocks. Covered calls may come with the added risk of losing potential profit; however the consistency which they bring can be well worth the risk in many cases.
