Covered Calls
June 12, 2024
An Underutilized strategy.
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A covered call is an options trading strategy – frequently implemented with blue chip stocks – that offers limited return for limited risk. Covered call investing involves owning a stock and selling call options against it. It is often an under-utilized strategy.
A two-part strategy in which a stock is owned (or purchased) and then calls are written and sold to a third party. By doing so, you generate income through the premium received from selling the call options. If the stock’s price remains below the option’s strike price, you keep the premium and keep your stock. If the stock rises above the strike price, you might have to sell your stock but still keep the premium. It’s a strategy often used to enhance income and mitigate downside risk. It can also be used to decrease your costs basis of owning a particular stock.
Like any investment strategy, covered call writing has advantages and disadvantages. You should always consult your professional advisor before implementing any investment strategy.
