Here are twelve fast facts about writing covered call options on your stock holdings:
- A covered call gives the buyer of the call the right but not the obligation to call away your stock at the strike price.
- The option chain you want to trade has to have liquidity to avoid losing too much in the bid/ask spreads.
- The farther out you go from at-the-money, front month options the less liquidity you will have.
- A covered call option is the same as a naked put option. You are accepting a small option premium to take on unlimited risk to the downside.
- Stop losses on your stock holdings are crucial to limit the downside risk.
- Covered calls act as a stop gain on the upside of your holdings.
- Out of the money covered calls can give you room to collect gains in your stock before the covered call goes in the money.
- If a covered call option goes in the money you have to buy it back with the profits on your stock or let your stock be called away.
- Covered calls are great tools when you are writing at the price you want your stock to be called away at so if your call goes in-the-money you win.
- Covered calls can generate on going income in a stock that is a long term holding any way.
- Covered calls should only be written on leading stocks that are in an uptrend.
- Never hold a covered call through an earnings announcement due to the downside risk in the underlying and the capped upside.
