Learn How to Sell Covered Calls

Learn How to Sell Covered Calls

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If you’re looking to generate income from your investment portfolio, one strategy you may want to consider is selling covered calls. With this strategy, you essentially sell the right to buy a security at a set price (the strike price) at some point in the future (the expiration date).

If the security’s price never reaches or exceeds the strike price before expiration, then you keep the premium and can repeat the process. But if the security’s price rises above the strike price, then the buyer of your call option can purchase the security from you at that price, and you would forfeit any further upside potential.

 

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Covered call writing can be an effective way to generate income from a portfolio that might otherwise be generating little or no return. And since you’re essentially selling insurance against a price increase, you can often collect a higher premium than you would for simply selling the security outright.

Of course, there are some risks to consider with this strategy. First, by selling a covered call, you’re giving up any upside potential above the strike price.

So if the security’s price skyrockets, you could miss out on substantial profits. Second, if the security’s price falls below the strike price before expiration, you may be forced to sell at a loss.

Before you start selling covered calls, it’s important to understand the mechanics of how they work and to assess whether this strategy is right for your investment goals.

 

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Learn How to Sell Covered Calls: How Covered Calls Work

When you sell a covered call, you’re selling someone the right to buy a security from you at a set price (the strike price) on or before a certain expiration date. In exchange for this right, the buyer pays you a premium.

For example, let’s say you own 100 shares of XYZ stock, which is currently trading at $50 per share. You could sell one XYZ May 50 call for $2 per share. This would give the buyer the right to purchase your 100 shares of XYZ stock for $50 each on or before May expiration. In exchange for selling this call, you would receive a premium of $200 ($2 x 100 shares).

If XYZ stock never trades above $50 per share before May expiration, then the call will expire worthless and you’ll keep the premium as profit.

However, if XYZ stock does trade above $50 per share before May expiration, then the buyer of your call can purchase the shares from you at $50 each. In this case, you would still get to keep the premium, but you would forfeit any upside potential above $50. For example, if XYZ stock rose to $55 per share, you would sell your shares for a total of $5,050 ($50 x 100 shares + $200 premium). If XYZ stock rose to $60 per share, you would sell your shares for a total of $5,600 ($60 x 100 shares + $200 premium).

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Thus, when you sell a covered call, you’re agreeing to sell your shares at a set price (the strike price), but you’re also collecting a premium that will offset some of your potential losses if the stock price falls. And if the stock price never reaches the strike price, then you get to keep the entire premium as profit.

Covered calls are most commonly used with stocks, but they can also be written on other securities such as exchange-traded funds (ETFs) and mutual funds.

As with any investing strategy, there are risks to consider before selling covered calls. First, by selling a covered call, you’re giving up any upside potential above the strike price. So if the underlying security’s price skyrockets, you could miss out on substantial profits.

Second, if the security’s price falls below the strike price before expiration, you may be forced to sell at a loss. For example, let’s say XYZ stock is trading at $50 per share and you sell a May 50 call for $2 per share. If XYZ stock falls to $48 per share before May expiration, the call will still have intrinsic value of $2 (the difference between the stock price and the strike price). Thus, the buyer will exercise their option and purchase your shares at $50 each, forcing you to sell at a loss.

To help offset these risks, some investors choose to write covered calls on securities that they would be comfortable owning even if the price fell below the strike price. This way, if the security’s price does fall and they’re forced to sell, they won’t mind holding onto the shares.

Another way to offset these risks is to set a stop-loss order at a price below which you would be comfortable selling the shares. This way, if the security’s price falls below your stop-loss price, your shares will be automatically sold and you can avoid taking a loss.

 

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                                                             GainzAlgo Review

He started from nothing and became a multimillionaire…

He’s now one of the most sought-after trading experts…

Yet he operates 858 miles from Wall Street.

And now, he’s revealing his #1 favorite strategy that targets MASSIVE weekly profits with just one stock ticker.

 

>>SEE THE PROOF HERE<<

*****************************************

 

 

Pros and Cons of Selling Covered Calls

Selling covered calls can be a great way to generate income from your investment portfolio. It can also help you protect your downside risk by offsetting some of your potential losses if the stock price falls. However, there are also some drawbacks to consider before using this strategy.

First, by selling a covered call, you’re giving up any upside potential above the strike price. So if the underlying security’s price skyrockets, you could miss out on substantial profits.

Second, if the security’s price falls below the strike price before expiration, you may be forced to sell at a loss. For example, let’s say XYZ stock is trading at $50 per share and you sell a May 50 call for $2 per share. If XYZ stock falls to $48 per share before May expiration, the call will still have intrinsic value of $2 (the difference between the stock price and the strike price). Thus, the buyer will exercise their option and purchase your shares at $50 each, forcing you to sell at a loss.

To help offset these risks, some investors choose to write covered calls on securities that they would be comfortable owning even if the price fell below the strike price. This way, if the security’s price does fall and they’re forced to sell, they won’t mind holding onto the shares.

Another way to offset these risks is to set a stop-loss order at a price below which you would be comfortable selling the shares. This way, if the security’s price falls below your stop-loss price, your shares will be automatically sold and you can avoid taking a loss.

 

Learn How to Sell Covered Calls: Conclusions

Selling covered calls can be a great way to generate income from your investment portfolio. Give it a try!

 

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