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This graph indicates profit and loss cover call option trading expiration, respective to the stock value when you sold the call. Selling the call obligates you to sell stock you already own at strike price A if the option is assigned.
Covered calls can also be used to achieve income on the stock above and beyond any dividends. The goal in that case is for the options to expire worthless. As a general rule of thumb, you may wish to consider running this strategy approximately days from expiration to take advantage of accelerating cover call option trading decay as expiration approaches.
Of course, this depends on the underlying stock and market conditions such as implied volatility. Beware of receiving too much time value. Check for news in the marketplace that may affect the price of the stock. Remember, if something seems too good cover call option trading be true, it usually is. Covered calls can be executed by investors at any level.
The sweet spot for this strategy depends on your objective. If you are selling covered calls to earn income on your stock, then you want the stock to remain as close to the strike price as possible without going above it.
If you want to sell the stock while making additional profit by selling the calls, then you want the stock to rise above the strike price and stay there at expiration. That way, the calls will be assigned. You still made out all right on the stock. Do yourself a favor and stop getting quotes on it. When the call is first sold, potential profit is cover call option trading to the strike price minus cover call option trading current stock price plus the premium received for selling the call.
You receive a cover call option trading for selling the option, but most downside risk comes from owning the stock, which may potentially lose its value.
For this strategy, time decay is your friend. You want the price of the option you sold to approach zero. That means if you choose to close your position prior to expiration, it will be less expensive to buy it back.
After the strategy is established, you want implied volatility to decrease. That will decrease the price of the option you sold, so if you choose to close your position prior to expiration it will be less expensive to do so. Options involve risk and are not suitable for all investors.
For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risksand may result in complex tax treatments.
Please cover call option trading a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract.
There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.
System response and access times may vary due to market conditions, system performance, and other factors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.
The projections or other information regarding cover call option trading likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results.
All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. The Options Playbook Featuring 40 options strategies cover call option trading bulls, bears, rookies, all-stars and everyone in between. The Strategy Selling the call obligates you to sell stock you already own at strike price A if the option is assigned.
Options Guy's Tips As a general rule of thumb, you may wish to consider running this strategy approximately days from expiration to take advantage of accelerating time decay as expiration approaches. Break-even at Expiration Current stock price cover call option trading the premium received for selling the call. The Sweet Spot The sweet spot for this strategy depends on your objective. Maximum Potential Profit When the call is first sold, potential profit is limited to the strike price minus the current stock price plus the premium received for selling the call.
Maximum Potential Loss You receive a premium for selling the option, but most downside risk comes from owning the stock, which may potentially lose its value. Cover call option trading Invest Margin Requirement Because you own the stock, no additional margin is required. As Cover call option trading Goes By For this strategy, time decay is your friend. Implied Volatility After the strategy is established, you want implied volatility to decrease.
View the Option Chains for your stock. Static Return assumes the stock price is unchanged at expiration and the call expires worthless. If Called Return cover call option trading the stock price rises above the strike price and the call is assigned.