Covered Call Options Education

In this video, Liz teaches us how to trade options using a covered call. The world of options trading is a very complicated one. She is going to use Zecco Trading as an options trading platform. A covered call is an investment strategy. You own a specific stock and then you write a call against that stock. By doing that, you will increase the chance of making money on the stock. Everybody knows that when you buy a stock if the price of that stock goes up you make money and if it goes down you loose money. But when you write a covered call you collect option premium immediately. So, if the price of the stock goes up your upside is still there. This happens because when you write a covered call you give to someone else the right to buy or to call away your stock. On the other hand, if the price of the stock goes down your losses are partially offset by your call.

Covered Call Example

Now, Liz shows a specific example. Being given 100 shares of a company that is currently trading 10 dollars a share, you may not think that this is going to go up anywhere. So you sell a single call option for a dollar a share. Since one option controls 100 shares, you won 100 dollars immediately. And now your stock shares cover your obligations. This is cash for you to keep. Two scenarios follow, depending of the price of the stock goes up or goes down. If the price of the stock goes up, for example at $11.50 a share, you don't get that upside. The guy that bought that call does. But this is OK, since you will make $1,000 from the sales of your stock plus another $100 premium. Now, if the price of the stock goes down, for example at $8,50 a share, the value of your position goes down too. But your losses are at least partially offset by the premium you collected at the beginning of the trade. So, instead of having a loss of $150, you are only down fifty. This is what you need to know for the basics of a covered call.

There is something else you need to know. You are obligated to deliver the underline stock if an option you sell is ever exercised. The good news is that, as a covered call writer that you already planned for this to happen. You also have to know that is very risky to sell an underline stock.

Submitted by YouTube Trader on Thu, 04/08/2010 - 12:14

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