An investment portfolio generally comprises diverse assets like stocks, ETFs, mutual funds, and bonds. Although it offers numerous advantages, investing and trading in options, an additional asset class, is far riskier than regular equity investments. However, specialized options trading strategies like the covered call strategy can minimize risk and limit losses. Selling covered call options, a call option sold by the stock owner, offers downside protection along with short-term profits.
But before I address how to trade Options safely using covered call option screener services, let me tell you all about options and options trading.
What are Options?
An Option is a contract that allows but doesn’t obligate an investor to acquire or trade instruments at a pre-decided rate within a specified period. Furthermore, an option that permits you to buy shares is called a call option, while one that enables you to sell is a put option. Remember, you can only trade them at a fixed strike rate within the expiration date.
How Does Options Trading Work?
While buying or selling options, a trader has the liberty to implement that option at any point before the expiration date. Simply purchasing or selling an option doesn’t obligate you to exercise it. Options are considered derivative securities, i.e., the option price is derived from the value of underlying assets.
What are the Benefits of Options Trading?
- Low investment size
Buying options entails a lesser initial expense than acquiring the actual stock. The premium and trading fee for options is a lot cheaper than trying to purchase shares directly.
- Fixed stock price
The fixed stock price, also known as the strike price, ensures that options are traded at the fixed rate before the contract expires.
- Improved investment portfolio
You can use surplus income, leverage, protection, and hedging to limit your downside losses against the declining stock market and even create a recurring income source.
- Inherent flexibility
You can use options to buy shares and either add them to your investment portfolio or sell them at a profit. You can even sell the contract to another investor at a higher price before it expires.
What are Covered Call Options?
The covered call strategy entails an investor selling a call option contract of an owned stock. You can essentially lock in the asset price by selling a covered call option, thereby enabling you to enjoy a short-term profit. Moreover, you also get a little protection from any future stock price declines.
A covered call screener is ideal for moderately bullish situations where the expected upside potential of your stock is limited. The covered call stock screener is excellent at predicting when the stock forecast is not very bright and when making short-term profits is a better idea than keeping the stock.
How Does the Covered Call Strategy Work?
You’re required to own a company stock first before you can use the covered call strategy. Let’s say your view was bullish when you bought the stock, but as time passed, you grew doubtful of the future upside potential, and you don’t expect the stock price to rise much. The best thing to do in such a situation is to book a short-term profit and protect yourself from future stock price decline by using a covered call option.
When you sell a call option of the stock at a strike price higher than the stock purchase price, the buyer has to offer you a premium that you keep irrespective of the option status. Once the covered call strategy has been executed, one of the following three things can happen:
1. Stock Prices Rise
You enjoy a guaranteed short-term profit since you’ve already locked the stock sale price by selling a covered call option. Furthermore, the premium amount paid by the buyer is yours to keep.
2. Stock Prices Fall
You get limited protection from the market downside by using the premium amount to cut back on your losses during a stock price fall in the market.
3. Stable Stock Prices
Your profit in such a scenario is the premium amount you collected from the buyers, which you get to keep irrespective of whether they exercised the option or not.
Losses can also occur in a covered call strategy if the stock price falls below the breakeven point. An opportunity risk also presents itself if the stock prices rise above the strike price. All said and done, it is generally considered a good idea to exercise caution while dealing with options trading.
Author Bio: Adrian Collins works as an Outreach Manager at optionDash. OptionDash is always looking forward to offering the best covered call and cash secured put screener on the internet. Adrian is passionate about spreading knowledge on stock and options trading for the rising investors.