What are the covered calls?

correctly, investing in the stock market can provide excellent return on capital. However, one should pay attention to mysterious strategies whose promoters can bring outrageous returns far beyond what the conservative investor should expect. This means that covered calls are one of the more conservative strategies and have less risk than other options or derivatives. In the covered call, however, you agree in advance to sell shares at an agreed price, called strike price. At the other end of the transaction, another investor buys a possibility, which is the right to buy your shares that the price strike. The seller gets the option of indoor calls that the buyer pays option. Do not press the possibility, the bonus is still obtained. The investor's shareholders earn money, even if the price is stable or reduces if there are options buyers who want to buy options on stocks.

buying optionsalso gains a potential advantage; They get the right to buy shares at a predetermined price. If the stock price increases beyond this point, they can apply their possibility and obtain immediate profit. Suppose, for example, the shares are traded for $ 10 and the strike is $ 12; Suppose the stock price at once exceeds $ 20. The buyer options use the possibility to buy shares for $ 12 and immediately turn them and sell it for $ 20.

The obvious disadvantage of this strategy is that the writer of covered calls loses profits that would come from the sale of shares at a real price of $ 20, and instead they have to sell them for $ 12. However, HTO is alleviated by the fact that in the long term, the writer of indoor calls earned profits, while the shares were not in the price of growing, selling options that were not performed. When the option does not perform this option, the author of the covered calls still gets to the bonus.

bonuses can reach 10 percent of the stock value or more for a single -month contract. The bonuses are higher for voltatile supplies. This increases the second disadvantage of covered calls. The best premiums are obtained from the shares that are most volatile, which means that if the stock price drops significantly, there will be less demand for options - the covered investor can lose money. Therefore, it is important when using this strategy to carry out proper care for each stock, to explore its foundations and invest only in the risk that are acceptable to you.