If the market moves higher still and the time remaining, until Dec expiration, is more than 30 days, I will try to sell another call spread.
If your broker does not allow the calculation of the Greeks for a different date, tell them how important it is for you to be able to do that. Think about what you will do when the rally continues and you now have to cover the other 27 of your original spread and again increase size. Ok technically and theoretically they are the same naked put and covered call but since the market is not always perfect we can look at AAPL situation today as an example. No matter what the underlying is at any time before expiry, if you do the maths, you are making on the covered call a $100.
But how often you can find a situation like this, i can say many times, but by the time you compare the prices and enter the first leg of the covered call let’s say by buying the stock first then the prices change on the market and that small opportunity you see can move from green to red. The core principle of writing covered calls is that you are controlling risk and attempting to improve returns on a stock or exchange-traded fund (ETF) that you own.
You can do this by selling a call option against that stock or ETF and collecting the option premium.
The second step in writing a covered call is to sell a call against that long stock or ETF position. There are several factors to consider when you are selling the call, including expiration date, strike price and premium.
Let’s assume you had owned 500 shares of AAPL in late March 2008, when the stock was priced at $140, and sold a call against it with a strike price of $145 and a premium of $6 per share, or $600 per contract. As the seller, you were paid $600 of premium per contract for five contracts of AAPL calls you sold, for a total of $3,000. By April’s expiration the stock is at $155 per share and the call buyer wants the stock.
You bought the shares of AAPL for $140, so by selling it for $145, you made an additional $5 per share, or $2,500, plus you keep the premium for the calls of $3,000. The difference is substantial, in that the covered call was a profitable trade, whereas just writing a call without owning the stock would have resulted in a loss. The advantage of selling the call is not as evident when the market is rising, but really comes into play when prices drop.
Selling the call and earning the premium provided $3 per share of protection against losses. Covered calls are not only a great way to limit your liability as an option writer, but they are an excellent way to hedge risk on your stock holdings as well.
If the call is priced too high, they buy puts, buy stock and sell the calls until the calls are no longer priced too high.
A covered call consists of a two-step process that is easy to implement by new and experienced investors alike. In this article we will walk through a case study of a covered call to begin answering these questions. If prices rise and the call buyer wants to purchase the stock, you have the ability to fulfill on the contract without going to the open market because you already own the stock. If I buy an IC with the same premium as the first one (ie 0.50), using the size calculator, I will buy again 40 contracts. This alleviates the problems with selling a call alone that we discussed in part one of this series.
That's the beauty of this strategy.When you sell options - puts and calls - you're instantly putting money into your pocket. It's a true source of income - one that I call a 'self-given salary increase', because it literally boosts your income, no matter how much money you make in your day job.
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