A Beginners Look at Writing Covered Call Options

Mickey | Financial Services | Saturday, November 27th, 2010

In the world of stock options trading, the beginning trader needs to understand two basic concepts the call and the put, as well as the various strategies in playing with the two. Writing covered call options is one of those strategies, being a call option written by the actual owner of the underlying assets. It is considered by many to be one of the safest moves to make in stocks.

One of the main features of writing covered call options is increased safety. Since the call writer is the owner, or soon to be owner of the underlying, the buyer will have no fears that the seller cannot deliver the goods at the moment he decides to exercise his right to buy. In essence, the underlying assets are already covered for because they are owned by the seller.

Another feature of this strategy is that it is usually done for stocks which are not moving significantly up or down. This means that the owner, or the writer, of the option expects to gain more profit through the premium that the buyer pays him, than he would otherwise get by observing the trends. However, the buyer of the assets knows this, but he decides to buy them anyway, hoping that the price of the underlying will move up in the future.

One good thing about this strategy is that it is a safe way to earn income regularly. One either buys a lot of stocks that are not very movable, or buys them a little at a time every month. Then, one finds a buyer for these stocks and sells them at a premium. This process can be done every month to earn money. It is even better if the seller is called out, meaning someone buys all his stocks, as this means he gets a lot of money to reinvest somewhere else.

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