Wall Street's Best Kept Secret - Covered Call Option Writing
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If you're new to the world of investing, options can be a daunting topic, but covered call writing is an excellent way to dip your toe in the water.So, what is a covered call option? A covered call is a strategy where an investor sells a call option on an underlying asset they already own. The option contract gives the buyer the right, but not the obligation, to buy the underlying asset at a set price, known as the strike price, before the expiration date.When an investor sells a call option, they collect a premium upfront from the buyer. If the underlying asset's price stays below the strike price, the option expires worthless, and the seller keeps the premium. However, if the underlying asset's price rises above the strike price, the option buyer can exercise their right to buy the asset, and the seller must sell it at the agreed-upon price.Now, let's discuss how to execute a covered call strategy. Here are the steps:
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If you're new to the world of investing, options can be a daunting topic, but covered call writing is an excellent way to dip your toe in the water.So, what is a covered call option? A covered call is a strategy where an investor sells a call option on an underlying asset they already own. The option contract gives the buyer the right, but not the obligation, to buy the underlying asset at a set price, known as the strike price, before the expiration date.When an investor sells a call option, they collect a premium upfront from the buyer. If the underlying asset's price stays below the strike price, the option expires worthless, and the seller keeps the premium. However, if the underlying asset's price rises above the strike price, the option buyer can exercise their right to buy the asset, and the seller must sell it at the agreed-upon price.Now, let's discuss how to execute a covered call strategy. Here are the steps:
- Choose the underlying asset: A good starting point for beginner investors is to choose a blue-chip stock that you're already comfortable owning.
- Determine the strike price: The strike price is the price at which the option buyer can buy the underlying asset. Choose a strike price that's slightly higher than the current market price to receive a higher premium.
- Choose the expiration date: Options contracts have an expiration date, after which they become worthless. Choose an expiration date that aligns with your investment goals.
- Sell the call option: Once you've determined the underlying asset, strike price, and expiration date, you can sell the call option. You'll receive the premium upfront.
- Monitor the position: Keep an eye on the price of the underlying asset. If the price rises above the strike price, you may need to sell the asset at the strike price.
- Repeat the process: Once the option expires or gets exercised, you can repeat the process by selling another call option.
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