When it comes to options trading strategies, many beginning investors often wonder what technique is best to help get them started. While it is certainly true that all options involve an element of risk, writing covered calls is perhaps the most conservative, and potentially profitable, approach.
Covered calls actually serve to enhance an overall stock position. If, for example, an investor owns 100 shares of stock in a company, they could sell 1 call contract against that position. By simply selling that call, the investor earns a cash premium; which is immediately deposited into his or her account.
In exchange for receiving cash, the investor agrees to assume a specific obligation; that is, to sell 100 shares of stock at a certain price on, or before, the expiration date. Typically, the most conservative approach is to sell the call at a higher price than the current market price. In essence, a covered call writer is saying that if their stock reaches a certain price above what it is right now, they agree to sell their stock to the call buyer.
Options Trading Strategies
Most beginning investors start by buying and selling shares of stock. This is where most of the real risk is. Once an investor becomes comfortable assuming this type of risk, it is just a short step to selling covered calls. The major risk of the covered call strategy is if the price of the underlying stock goes down in value. The risk associated with the options component is simply an opportunity risk. If the price of the stock increases to a price that is higher than the strike price at which the investor sold the call, they will not get to participate in any profits above the strike price.
All options involve risk. If you are interested in trying out one of these options trading strategies, please contact a certified investment specialist for more information.