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Atricle Dump - Understanding Covered Calls - Part 2
There are hundreds of people making a lot of money online and most of them are the kind of people you would walk past in the street without ever noticing them. They are housewives, bankers, pizza delivery boys and session musicians.These Internet Marketers come from a variety of backgrounds – and most of them didn’t come from a wealthy background. In fact, the majority of them came from a poor background and were extremely broke before they became wealthy.You may not realize that what one person can do, another person can learn. By studying the mindset, the strategies and the approaches of these successful people you can understand how they did it, apply it to your life and become a success yourself.So what are the traits of these successful Internet Marketers?The first definite trait is that of determination. Every success
“At the Money” “At the Money” covered calls are covered calls that are written with a strike price that is exactly the same as the current price of the underlying security.
Example – Writing “At the Money” Covered Calls · An investor holds 1000 shares of QQQQ on August 17th, 2006 valued at $38.00 per share· The investor writes 10 call options at $38.00 per share strike price for his QQQQ holdings with an expiration date of Friday September 15, 2006 @ $.20 per share
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In part two, things become a bit more complex. In this section we will discuss three key methods of writing covered calls respectively known as “In the Money”, “Out of the Money”, and “At the Money”
“In the Money” “In the Money” covered calls are a bit confusing to the novice options trader, which is why I’ve decided to discuss them first in this article. In the money calls are useful for generating returns when the underlying security is expected to be flat or slightly down during the options period.
In the Money covered calls typically result in capital depreciation. This sounds bad, but it’s really not. Although capital depreciation often occurs when writing in the money covered calls, the premium received for selling the option is often large enough to completely offset the capital depreciation.
Generally, it can be expected that if you write in the money covered calls, that you are prepared for your underlying shares to sell. Thus, selling in the money covered calls is a strategy that is useful to generate returns during times of declining market value.
Example – Writing an “In the Money” Covered Call · An investor holds 1000 shares of QQQQ on August 16th, 2006 valued at $37.70 per share· The investor writes 10 call options at $37.00 per share strike price for his QQQQ holdings with an expiration date of Friday September 15, 2006 @ $2.15 per share· When the call options sell, the investor receives $2150 in his account. These are the proceeds for the call option contracts, and are the investor’s to keep· If the expiration date is reached and the share price of QQQQ is greater than $37.00, it is very likely that the shares will be called away by the holder of the options contract· If the expiration date is reached and the share price of QQQQ is less than $37.00, it is unlikely that the shares will be called away by the holder of the options contract· The investor is also free to purchase back his options at a lower price closer to the expiration date and close his position, thereby retaining his underlying shares. As stated previously, selling in the money covered calls is a useful strategy during a declining market.
“Out of the Money” “Out of the Money” covered calls are the typical method of writing covered calls. I have quoted the example presented in part one, because that is a good example of writing an out of the money covered call:
Example – Writing “Out of the Money” Covered Calls · An investor holds 1000 shares of QQQQ on August 16th, 2006 valued at $37.70 per share· The investor writes 10 call options at $39.00 per share strike price for his QQQQ holdings with an expiration date of Friday September 15, 2006 @ $.30 per share· When the call options sell, the investor receives $300 in his account. These are the proceeds for the call option contracts, and are the investor’s to keep· If the expiration date is reached and the share price of QQQQ is $39.00 or greater, then the shares are likely to be called away.· If the expiration date is reached and the share price of QQQQ is less than $39.00, it is unlikely that the shares will be called away. It is most likely that the option contract will expire worthless.· The investor is also free to purchase back his options at a lower price closer to the expiration date and close his position, thereby retaining his underlying shares. Out of the money calls are typically most useful in a market that is expected to remain flat or to increase slowly.
“At the Money” “At the Money” covered calls are covered calls that are written with a strike price that is exactly the same as the current price of the underlying security.
Example – Writing “At the Money” Covered Calls · An investor holds 1000 shares of QQQQ on August 17th, 2006 valued at $38.00 per share· The investor writes 10 call options at $38.00 per share strike price for his QQQQ holdings with an expiration date of Friday September 15, 2006 @ $.20 per share<
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Generally, it can be expected that if you write in the money covered calls, that you are prepared for your underlying shares to sell. Thus, selling in the money covered calls is a strategy that is useful to generate returns during times of declining market value.
Example – Writing an “In the Money” Covered Call · An investor holds 1000 shares of QQQQ on August 16th, 2006 valued at $37.70 per share· The investor writes 10 call options at $37.00 per share strike price for his QQQQ holdings with an expiration date of Friday September 15, 2006 @ $2.15 per share· When the call options sell, the investor receives $2150 in his account. These are the proceeds for the call option contracts, and are the investor’s to keep· If the expiration date is reached and the share price of QQQQ is greater than $37.00, it is very likely that the shares will be called away by the holder of the options contract· If the expiration date is reached and the share price of QQQQ is less than $37.00, it is unlikely that the shares will be called away by the holder of the options contract· The investor is also free to purchase back his options at a lower price closer to the expiration date and close his position, thereby retaining his underlying shares. As stated previously, selling in the money covered calls is a useful strategy during a declining market.
“Out of the Money” “Out of the Money” covered calls are the typical method of writing covered calls. I have quoted the example presented in part one, because that is a good example of writing an out of the money covered call:
Example – Writing “Out of the Money” Covered Calls · An investor holds 1000 shares of QQQQ on August 16th, 2006 valued at $37.70 per share· The investor writes 10 call options at $39.00 per share strike price for his QQQQ holdings with an expiration date of Friday September 15, 2006 @ $.30 per share· When the call options sell, the investor receives $300 in his account. These are the proceeds for the call option contracts, and are the investor’s to keep· If the expiration date is reached and the share price of QQQQ is $39.00 or greater, then the shares are likely to be called away.· If the expiration date is reached and the share price of QQQQ is less than $39.00, it is unlikely that the shares will be called away. It is most likely that the option contract will expire worthless.· The investor is also free to purchase back his options at a lower price closer to the expiration date and close his position, thereby retaining his underlying shares. Out of the money calls are typically most useful in a market that is expected to remain flat or to increase slowly.
“At the Money” “At the Money” covered calls are covered calls that are written with a strike price that is exactly the same as the current price of the underlying security.
Example – Writing “At the Money” Covered Calls · An investor holds 1000 shares of QQQQ on August 17th, 2006 valued at $38.00 per share· The investor writes 10 call options at $38.00 per share strike price for his QQQQ holdings with an expiration date of Friday September 15, 2006 @ $.20 per share
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“Out of the Money” “Out of the Money” covered calls are the typical method of writing covered calls. I have quoted the example presented in part one, because that is a good example of writing an out of the money covered call:
Example – Writing “Out of the Money” Covered Calls · An investor holds 1000 shares of QQQQ on August 16th, 2006 valued at $37.70 per share· The investor writes 10 call options at $39.00 per share strike price for his QQQQ holdings with an expiration date of Friday September 15, 2006 @ $.30 per share· When the call options sell, the investor receives $300 in his account. These are the proceeds for the call option contracts, and are the investor’s to keep· If the expiration date is reached and the share price of QQQQ is $39.00 or greater, then the shares are likely to be called away.· If the expiration date is reached and the share price of QQQQ is less than $39.00, it is unlikely that the shares will be called away. It is most likely that the option contract will expire worthless.· The investor is also free to purchase back his options at a lower price closer to the expiration date and close his position, thereby retaining his underlying shares. Out of the money calls are typically most useful in a market that is expected to remain flat or to increase slowly.
“At the Money” “At the Money” covered calls are covered calls that are written with a strike price that is exactly the same as the current price of the underlying security.
Example – Writing “At the Money” Covered Calls · An investor holds 1000 shares of QQQQ on August 17th, 2006 valued at $38.00 per share· The investor writes 10 call options at $38.00 per share strike price for his QQQQ holdings with an expiration date of Friday September 15, 2006 @ $.20 per share
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Example – Writing “Out of the Money” Covered Calls · An investor holds 1000 shares of QQQQ on August 16th, 2006 valued at $37.70 per share· The investor writes 10 call options at $39.00 per share strike price for his QQQQ holdings with an expiration date of Friday September 15, 2006 @ $.30 per share· When the call options sell, the investor receives $300 in his account. These are the proceeds for the call option contracts, and are the investor’s to keep· If the expiration date is reached and the share price of QQQQ is $39.00 or greater, then the shares are likely to be called away.· If the expiration date is reached and the share price of QQQQ is less than $39.00, it is unlikely that the shares will be called away. It is most likely that the option contract will expire worthless.· The investor is also free to purchase back his options at a lower price closer to the expiration date and close his position, thereby retaining his underlying shares. Out of the money calls are typically most useful in a market that is expected to remain flat or to increase slowly.
“At the Money” “At the Money” covered calls are covered calls that are written with a strike price that is exactly the same as the current price of the underlying security.
Example – Writing “At the Money” Covered Calls · An investor holds 1000 shares of QQQQ on August 17th, 2006 valued at $38.00 per share· The investor writes 10 call options at $38.00 per share strike price for his QQQQ holdings with an expiration date of Friday September 15, 2006 @ $.20 per share
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“At the Money” “At the Money” covered calls are covered calls that are written with a strike price that is exactly the same as the current price of the underlying security.
Example – Writing “At the Money” Covered Calls · An investor holds 1000 shares of QQQQ on August 17th, 2006 valued at $38.00 per share· The investor writes 10 call options at $38.00 per share strike price for his QQQQ holdings with an expiration date of Friday September 15, 2006 @ $.20 per share· When the call options sell, the investor receives $200 in his account. These are the proceeds for the call option contracts, and are the investor’s to keep· If the expiration date is reached and the share price of QQQQ is $38.00 or greater, then the shares are likely to be called away.· If the expiration date is reached and the share price of QQQQ is less than $38.00, it is unlikely that the shares will be called away. It is most likely that the option contract will expire worthless.· The investor is also free to purchase back his options at a lower price closer to the expiration date and close his position, thereby retaining his underlying shares. “At the Money” covered calls are typically most useful to the investor in a market that expected to decline during the period of the options contract.
That concludes a more detailed look into covered call writing. These three methods of writing covered calls provide methods for writing covered call option contract in any type of predicted market environment.
Nothing published by CoveredCallMall should be considered personalized investment advice. Although our articles may answer your general questions or otherwise provide inspirations, this information should not be deemed personalized investment advice. Any information offered by CoveredCallMall should only be acted upon after consulting with a financial advisor and only after reviewing the prospectus and/or financial statements of the specific investment. CoveredCallMall, its employees, editors, agents, and owners are not responsible for errors, omissions, or loss.
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