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College University Generate Additional Income With Covered Calls With Low Risk
College University Generate Additional Income With Covered Calls With Low Risk
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Generate Additional Income With Covered Calls With Low Risk |
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Covered calls refers to a low risk options strategy involving an investor owning call options as well as the asset underlying the options. It is probably the lowest risk options strategy that can be devised. The primary purpose is to generate income. The income is generated by selling (or writing ) the portions.
Covered calls refers to a low risk options strategy involving an investor owning call options as well as the asset underlying the options. It is probably the lowest risk options strategy that can be devised. The primary purpose is to generate income. The income is generated by selling (or writing ) the portions. Selling call options opens up an investor to the risk of the options being exercised requiring the investor to supply the underlying shares. Under a covered call strategy, the investor already owns the underlying shares largely avoiding any negative consequences from this risk. The share ownership covers, or offsets the risk of, the call options. Under the strategy the investor, by definition, holds a long position in both options and the underlying asset. If the price of the asset rises so that the owner of the options exercises the option and makes a call on the asset, the investor already owns the asset and simply transfers that ownership to the option owner. The investor receives the appreciated price for that asset. Naturally, the investor benefits to the extent that the price of the asset has appreciated. The strategy is a buy-write (buy-sell) strategy. An investor buys shares and writes (sells) the call options knowing the shares protect against the call risk of the options. The strategy is based on an investor having neutral or negative price expectations regarding the underlying shares. An example may help illustrate the strategy. An investor buys one hundred shares in AAA Company at one hundred dollars per share. The investor expects the price of these shares to remain flat or maybe even fall over the next few months. Following purchase of the shares, the share investor sells one hundred AAA Company call options for one dollar an option. The options have a one hundred dollar strike price and one month expiry. This option sale generates income of one hundred dollars. From this position, one of three outcomes will unfold regarding the ABC stock price. First, it will remain flat within the ten to eleven dollar range. Second, it will fall below ten dollars. Third, it will rise above eleven dollars. Under scenarios one and two, the options expire without the owner exercising the call on the stock. In these situations, the owner continues to own the stock and has made an income of five hundred dollars through the sale of the options. In the third scenario, exercise of the call options is triggered. The investor is obligated to sell one hundred AAA shares. Total income from the share sale is ten thousand dollars. The investor also retains the one hundred option sale income. In summary, covered calls offer a low risk strategy to generate additional income from share ownership. Selling (writing) call options does place a cap on the potential share price upside an investor can gain through share price appreciation. However, this is not a major consideration since the cap can be managed by the investor by choosing an option series with an appropriate strike price. About the Author: Frank Cole Looking for more information on the exclusive low risk options strategy known as covered calls? Get the exclusive low down now in our overview of all you need to know about call strategy . |
Home College University Generate Additional Income With Covered Calls With Low Risk
College University Generate Additional Income With Covered Calls With Low Risk
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