Selling calls on your stocks can greatly increase your returns in the stock market. Most investors don’t utilize this strategy to make the most off of their investments.
So what exactly are covered calls? Well selling covered calls helps an investor to make some money up front by taking on the obligation to sell their stock at a specific strike price on or before a given date.
For instance if you buy a stock that is trading at $83 and sell the $85 call on if for $3 you would make $3 up front. The only disadvantage of this plan is that it can limit the amount you could make off of the investment.
If the stock goes above $85 then the investor who sold the call could miss some of the profit, for instance if it went up to $90 that investor would be forced to sell it at $85 and not $90.
This means that you could potentially lose an unlimited amount of potential profit. However by selling calls you can make money now and insure that you will make money even if the stock stays sideways. They can also be used to lessen the pain if the security goes against you.
One example of this would be if the stock actually went down to $80 instead of going up. Because the investor paid $83 for the stock they would lose $3, however because they made $3 on the call option they would actually break even. It can be a nice thing to do if you believe the stock is due to have a pullback.
In conclusion selling covered calls has a enormous potential and can definately help you increase your profits. It can work extremely well when combined with strong companies that have dividend paying stocks. Covered calls may come with the added risk of losing potential profit; however the consistency which they bring can be well worth the risk in many cases.
