How to Sell Covered Calls


          Covered calls are advanced stock options that can be used to generate small and steady income with a smaller risk profile than other types of stock investments and option investments. Covered calls are call options that are protected in the sense that the writer of the covered calls owns the number of shares of stock protected by the call option in his account. The writer sells a covered call against the stock that he currently owns. The writer of the covered calls receives a small fee for selling the covered call which immediately goes into his or her account. The call he or she sells is the option to purchase 100 shares of the given stock if the price of the stock rises to or above the strike price of that covered call. If this happens and the call option is exercised then the brokerage firm will make the writer of the covered call sell his shares of stock of the underlying security so that the exerciser of the covered call will now purchase the shares of stock at the strike price.

Step 1

You can either sell a covered call on a stock that you currently own or you can simultaneously write and sell a covered call at the same time as buying the shares of stock for the covered call. Either way you must own the number of shares of the covered call when you sell the covered call in the event that the call is exercised so that you can sell the shares of stock so the other person can take possession of them. For example if you own 200 shares of a stock you can sell 2 covered calls of that stock each one for 100 shares of stock at a certain strike price. You will receive a fee for selling the covered calls that can range anywhere from 10’s of dollars to hundreds of dollars.

Step 2

Understand how strike price affects when the covered call is executed. Now that you have sold your covered call and received your fee you have until the expiration date of the call to either sell your stock if required or not. Either way you keep the profit you made by selling the covered call in the first place.

Step 3

A covered call is basically a contract making you responsible for selling your stock at a given strike price so that someone else can take ownership of the stock. When choosing a covered call you generally want to choose a strike price out of the range of which you think the stock will travel to so that it does not exercise and you keep the profit of selling the covered call. If you want to exit out of the stock however then the strike price at which you sell the covered call at is at your discretion for the amount of profit you want to take on the stock. For example if your stock is currently at 90 dollars a share and you sell a covered call with a strike price of 100 dollars. Then you will make 10 dollars profit times 100 shares of stock when you sell the stock. In addition you will also have gained the fee from selling the covered call in the first place.

Step 4

If you want to take a higher profit from a covered call sell than you will have to sell one with a lower strike price that is closer to the current price of the stock. Unfortunately this means that you will most likely be called upon to sell your stock since there is a higher chance for the stock to hit the strike price.

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