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Options Trading Strategy:
Selling Covered Calls

A trader who bought stock could use the covered calls options trading strategy to generate additional income from the investments on the neutral market. Selling covered calls is selling a right to other traders to buy the underlying stock at specific price (Strike Price) and before or at specific date (Expiration Date). If a trader expects a market to be fairly neutral, he or she may consider selling covered calls.

The specific characteristic of the options is that they loose their value with time and this is in the hands of the options seller. The time decay is always on the side of an options seller and the closer to the expiration the more sold calls loose its value, by giving more chances to profit even in the neutral market.

Even if the options seller faces the unlimited risk, the covered call options trading strategy delivers some benefits:

  • By selling call options a trader receives a premium.
  • If the sold calls expire worthless, a trader keeps premium as a profit.
  • If the underlying stocks are traded above the strike price upon expiration, a trader may have to return the premium partially, and in addition the trader should receive profit from the owned stocks.
  • If the stocks drop in the price, a trader's loses are reduced by the premium received from the sold calls.

The negative characteristic is in case of the strong up-rally, when the call options could be probably exercised and the calls' seller will be obliged to sell the asset at the strike price (cheaper then current market price). In the case of the strong up rally when the price at which call options are exercised is far above the strike price, a trader could experience even losses.

The covered calls options trading strategy could be used when a trader owns stocks and expects the limited decline in the stocks price or flat movement, however is not willing to sell the stocks. In this way the received premium may help to off set the price decline.

If a trader expects the owned stock to rise in price, covered call options trading strategy could be used as additional income while he/she stands in the position waiting to sell the stocks at premium. I

If a trader expects a strong downside move, it's probably better to sell owned stocks.

As a rule with the options trading system that uses covered calls trading strategy, the out-of-the-money options calls are considered safer to sell. The in-the money options calls allow to collect higher, however the risk is grater as well. 1-2 months to the expiration options would deliver lower premium as well, however they are considered less risky then 2-3 month to the expirations options.

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The Information on the Site is provided for information purposes only. The Information is not intended to be and does not constitute financial advice or any other advice. The trading of stocks, futures, commodities, index futures or any other securities has potential rewards, and it also has potential risks involved. Trading may not be suitable for all users of this Website. Past performance is not necessarily an indication of future performance. You absolutely must make your own decisions before acting on any information obtained from this Website.

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