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Covered Calls
Covered calls are an options strategy designed to create income for investors who hold a block of shares of a stock. The selling of the "option to purchase" that stock at a fixed price generates income for the person who owns the stock, and creates three potential scenarios that can play out.
Scenario 1: Your stock's share prices to not increase, and the option expires. In this case YOU WIN because you keep the call option premium and still own the stock, which you can then sell for the same amount you purchased it for. You have outperformed the stock.
Scenario 2: Your stock's share prices increase and your option gets exercised. In this case YOU WIN because you collect and keep the premium price as well as the additional money from the price you sold at vs the price you bought at. If you paid $25 per share and the option gets exercised at $26 per share, you keep the $1 per share profit plus the option premium price. You have outperformed the stock.
Scenario 3: Your stock's share prices decrease and the option expires. In this case you will either break even or potentially lose money (but not as much as if you did not have a covered call option in place.) This is because you keep the covered call option price, and use that money to offset the loss of the stock price when you sell. In this case you have outperformed the stock because you have not lost as much as others who sell when the price goes down.
Writing "covered calls" is a strategy I use because it allows you to trade in a way that maximizes your gains and minimizes your losses over time. If used consistently, you will outperform the individual stocks you trade in. It is one of several trading strategies that I teach in my lessons as well as use in my own life
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