Covered Call Options are simply buying an underlying stock while selling a Call Option at a high strike price.
You end up either earning the premium if the option is OTM (Out of The Money), or the option getting exercised and your stocks assigned at your desired strike price if the option is ITM (In The Money).
The only downsides are that there are not many brokers that have an extensive list of options to trade in. Cost is also a factor, since it eats at your returns.
Most importantly, you will not participate in a large upside if the stock price soars, so good management and choice of option strike price are very important. So selling a call that is too long dated will also eat at any opportunity costs where your stocks are 'locked up' for the duration that you hold the option, particularly when the option is ATM (At The Money) or shallowly ITM such that it is not exercised. Then all you can do is wait.
But otherwise they are a great way to enhance your returns on a stock portfolio.
No comments:
Post a Comment