A professional option trader is well aware of the right time to employ any particular strategy, hence the philosophy that professionals sell options while amateur traders buy them! An option is written by the seller in exchange for a premium from the buyer, with the surmise that the option will be worthless on expiration and accordingly have the expectation of retaining the premium.
Therefore, for an option buyer, the risk is limited to the premium that was paid for the option, but a seller assumes the responsibility of unlimited risk.
A financial transaction in which sellers of call options own the corresponding amount of, for example, shares, stocks or other securities is a covered call.
Investing in this option is not a quick profit return strategy, but is regarded as an income oriented approach for any individual, especially with the incentive of receiving a call premium every month.
It is a well designed strategy, often used by experienced traders and those new to options and due to it being a limited risk, there are fewer restrictions placed on the use of this particular strategy by brokerage firms.
It is necessary to be specifically approved by a broker before using a covered call strategy.
There are many traders seeking opportunities on options they believe to be over valued and will offer a tempting return.
To engage in a covered call situation on a stock not owned by you, the strategy would be to purchase immediately the stock and sell the call.
Engaging this strategy, it would be possible for the stock to decrease in value and to extricate yourself from this position; it would require buying back the option and selling the stock.
It is a natural progression that eventually the option will reach the expiration date, with the potential of being worthless and accordingly not exercised.
In these circumstances there is no need for you to take any action.
Should you want to retain your position, you could write a further and extended option against your stock.
However, although there is the potential for an out of money option to be exercised, it is very unusual.
There are various reasons why traders use covered call strategy, the primary one being the production of income on stock already in their portfolio.
Some traders although partial to the concept of profiting from option premiums, dislike taking the unlimited risk of writing uncovered options.
A proficient use of this strategy is that if you wanted to retain certain stock as a long-term hold, for example related to tax or dividend purposes.
You could believe that this stock is unlikely to appreciate in the current market conditions; therefore, you elect to write covered calls against your present situation.
If the option is in the money, then you may expect it to be exercised, but it will depend on your brokerage firm as to whether you need to be concerned by this.
However, you should be aware of any fees that may be imposed relating to this situation and accordingly plan for this.
Therefore, for an option buyer, the risk is limited to the premium that was paid for the option, but a seller assumes the responsibility of unlimited risk.
A financial transaction in which sellers of call options own the corresponding amount of, for example, shares, stocks or other securities is a covered call.
Investing in this option is not a quick profit return strategy, but is regarded as an income oriented approach for any individual, especially with the incentive of receiving a call premium every month.
It is a well designed strategy, often used by experienced traders and those new to options and due to it being a limited risk, there are fewer restrictions placed on the use of this particular strategy by brokerage firms.
It is necessary to be specifically approved by a broker before using a covered call strategy.
There are many traders seeking opportunities on options they believe to be over valued and will offer a tempting return.
To engage in a covered call situation on a stock not owned by you, the strategy would be to purchase immediately the stock and sell the call.
Engaging this strategy, it would be possible for the stock to decrease in value and to extricate yourself from this position; it would require buying back the option and selling the stock.
It is a natural progression that eventually the option will reach the expiration date, with the potential of being worthless and accordingly not exercised.
In these circumstances there is no need for you to take any action.
Should you want to retain your position, you could write a further and extended option against your stock.
However, although there is the potential for an out of money option to be exercised, it is very unusual.
There are various reasons why traders use covered call strategy, the primary one being the production of income on stock already in their portfolio.
Some traders although partial to the concept of profiting from option premiums, dislike taking the unlimited risk of writing uncovered options.
A proficient use of this strategy is that if you wanted to retain certain stock as a long-term hold, for example related to tax or dividend purposes.
You could believe that this stock is unlikely to appreciate in the current market conditions; therefore, you elect to write covered calls against your present situation.
If the option is in the money, then you may expect it to be exercised, but it will depend on your brokerage firm as to whether you need to be concerned by this.
However, you should be aware of any fees that may be imposed relating to this situation and accordingly plan for this.