InvestorQ : How do I as a trader use covered calls in practice?
Niraja Mehta made post

How do I as a trader use covered calls in practice?

Answer
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Mary Joseph answered.
2 years ago


One of the popular ways of using options is through the implementation of hybrid strategies. In hybrids you either combine the options position with another option or with a cash or futures position. This way, you are able to define your risk and return parameters in a more granular fashion. One such popular strategy is called the covered call option. So, how exactly does it work?

In a covered call, an investor who is holding on to a long position in the stock or in the futures sells a higher call option. The expectation in this case is that the stock is unlikely to rise too sharply and so the Out-of-the-Money (OTM) call will expire worthless. When the option expires worthless the investor earns the entire premium and by consistently doing so he is able to reduce the cost of holding on the equity or futures position. Let us delve a little deeper with a live example of a stock.