Income strategy – Covered Call

The Covered Call is the most basic of income strategies, but it is very effective and can also be used by experts. From the name we knew that it use the call option which is protected by something. This strategy is an income strategy, so we first sell the call option. This way we can earn our income. If the option go down, then you are ok. But if the stock go up, you must be ready for the call option to be excercised. To protect your income, you must have the underlying or stock. So that, when the stock go up, you can offset the loss from the option with the stock.
You can sell In The Money or At The Money call at higher price than Out of The Money. But it is safer if you sell Out of The Money call, lower possibility of delivering the stock at the strike price of the sold call. So sell call option one or two strikes price higher than the stock. If the stock is purchased simultaneously with writing the call contract, the
strategy is commonly referred to as a “buy-write”.
By using this strategy, you can own the stock and having regular income from selling call option.
-If the share rises above the strike price, you will be exercised. Your loss from the option is offset by gain from stock.
-If the share rises below the strike price. You will receive the premium, and the call will expire worthlessly.
-If the share drops, there are variuos strategy. First, you can sell the share and let the option expire worthless. But this is dengerous, because you will be exposed to uncapped risk potential, if the stock rises again. Second, you can sell the share, and buy back tha call option (the safest). The third, buy put option to cover downside risk.

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