The covered call strategy is straightforward. Monthly cash income is generated by selling call options on stock that you own. When selling a call option you contract the delivery of stock owned at a price (strike price) for a specific amount of time (option month). In other words, the buyer has the right to buy your stock (at the strike price), and you are paid a premium (price paid for the purchase right). This investment strategy works best in a rising market or flat market. Why? It helps to maximize the yield (premium) of the held stock. What’s safe about options investing is that the strategy works well in a declining market, too. How? Use it to minimize losses by offsetting your stock’s devaluation with premium income. If you plan to hold the stock you buy or own for a long period of time, then writing covered calls (selling call options on owned stock) can greatly enhance the yield performance of your stock portfolio.
Call options can be written every month on the stocks you own. This is because the highest premiums are realized over single-month periods, rather than two or more months out in time. The stocks you choose to hold or buy should be stocks you plan to own for a long period of time. They should be steady growth stocks that have done well over the long term and can be prudently held even if a market decline occurs.
To keep commissions down, it’s best to write calls in contracts (lots) of five to ten. Since each contract is for 100 shares, plan to hold 500 to 1000 shares of each stock.
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