Why I Love Writing Covered Calls
Writing covered calls is one of the most powerful strategies to increase your return in the stock market. It is a strategy that I have used a lot before because it works, and works very well.
So what happens when you sell a covered call? Well basically you are getting money up front to be obligated to sell your stock at a given price on or before a given date.
For example say you own a stock trading at $42 and sell the $45 call on it for $4, You make the $4 up front but you will have to sell the stock at $45 if you are called out of it before it expires.
So if the stock goes up to $50 you will be forced to sell it at $45. This is the risk that you take, by selling covered calls you are risking missing some of the potential profit should the stock shoot up.
So why would you do this? Well, for one if you do not believe the stock will make a large move to the upside in the near future it could be a great way to get some extra cash flow. It could also help to ease the pain if your stock makes a large downward move in the short term.
It is even a great way to exit the position. If you are happy selling it at $42 and want you make some extra cash before you get out you could always sell the $40 call and make say $6. You would be called out at $40 if the stock stayed above it, but you would have made $6 on the call making it much more profitable than simply selling the stock.
In the end covered calls can work out great, especially if you combine them with high dividend paying stocks which also have great fundamentals.
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