How do you make money selling covered call options?

Profiting from Covered Calls A covered call is therefore most profitable if the stock moves up to the strike price, generating profit from the long stock position, while the call that was sold expires worthless, allowing the call writer to collect the entire premium from its sale.

How much income can you generate from covered calls?

In general, you can earn anywhere between 1 and 5\% (or more) selling covered calls. How much you earn depends on how volatile the stock market currently is, the strike price, and the expiration date. In general, the more volatile the markets are, the higher the monthly income you’ll earn from selling covered calls.

What do you do with covered calls in the money?

However, if the option is ITM at the expiration date, the seller has two choices: buy back the Call at its current price and keep the stock; or let the stock be called away and receive the exercise price not its higher current stock price.

Is selling covered calls a good strategy?

The Bottom Line. The covered call strategy works best on stocks where you do not expect a lot of upside or downside. Essentially, you want your stock to stay consistent as you collect the premiums and lower your average cost every month. Remember to account for trading costs in your calculations and possible scenarios.

What is the downside to covered calls?

Cons of Selling Covered Calls for Income The seller’s profit is limited to the premium received plus the difference between the stocks purchase price and the options strike price. A significant drop in the price of the stock (greater than the premium) will result in a loss on the entire transaction.

When should you sell covered calls?

Consider 30-45 days in the future as a starting point, but use your judgment. You want to look for a date that provides an acceptable premium for selling the call option at your chosen strike price. As a general rule of thumb, some investors think about 2\% of the stock value is an acceptable premium to look for.

How far out should I sell covered calls?

How do you write a covered call?

Writing A Covered Call. Step 1: Pick a stock that you already own and have at least 100 shares of. Step 2: Take a look at the stock’s options table. Call options are usually in the right hand column. Choose the call option you want to sell. After the expiration date the buyer of your call option cannot buy your stocks anymore.

Why to use a covered call?

The main goal of the covered call is to collect income via option premiums by selling calls against a stock that is already owned. Assuming the stock doesn’t move above the strike price, the trader collects the premium and is allowed to maintain the stock position (which can still profit up to the strike price).

What are the risks of selling covered calls?

The singular risk associated with covered calls is the loss of upside, i.e. if the shares are assigned (called away), the option seller forgoes any share price appreciation above the option strike price.

What is a covered option call?

A covered option is either a put or a call option which is covered (backed) by sufficient shares of the underlying security. An option is a covered option if sufficient shares are already owned to “cover” the option if it is exercised.