2.Strategy1:Enhancing Income - Practical Application of Covered Call Options Strategy

Tiger_Academy
2023-10-09
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Hello

In the previous lesson, we learned about the fundamental concepts of combining options and why we engage in options strategies. Today, we will introduce the first common type of portfolio strategy - the Covered Call Option Strategy.

1. What is the Covered Call Option Strategy?

If you hold stocks and expect a modest increase in their future price, there's a strategy that allows you to earn extra income while holding onto your stocks. This strategy is known as the Covered Call Option Strategy! In simple terms, you can sell a call option contract while holding onto your stocks. Of course, it's important to choose a higher strike price for the call option. But why is that?

If the stock price rises, you benefit from the increase in the stock's value. However, if the price rise surpasses the strike price of the call option, as the seller, you might face losses on the call option. Therefore, the strike price of the call option should be set higher than the expected increase in the stock's price. This ensures a higher probability of fully capturing the premium income.

As a result, the optimal outcome of this strategy is if the stock price increases but remains below the call option's strike price. This way, you not only gain from the stock's price appreciation but also avoid the call option being exercised, enabling you to earn the premium and generate additional income.

2. Practical Application of the Covered Call Option Strategy

Let's consider an example: Currently, Alibaba's stock price is around $94. Suppose you hold this stock and anticipate a slight increase in its price to around $96 in the future. If you were to employ the Covered Call Option Strategy, you would first hold Alibaba's stock at a cost of $94. Subsequently, you would sell a call option with a strike price of $96 or even higher.

It's important to note that if the strike price of the sold call option contract is below $96, and the future stock price indeed rises to $96 or higher, the sold call option could result in a loss. Therefore, the strike price must be equal to or greater than $96 to mitigate this risk. Theoretically, the higher the strike price chosen, the lower the probability of a loss on the sold call option, but this also comes with the trade-off of lower premium income.

Let's assume we sell a call option with a $96 strike price and receive a premium income of $0.57. If the future stock price stays between $94 and $96, we not only benefit from the stock's price increase but also earn an additional $0.57 in premium income.

In other words, as long as the stock price doesn't exceed $96.57, the call option can provide us with extra income. The only risk is when the stock price rises above $96.57. As the seller of the call option, we would experience a loss in this scenario, and we would need to close the call option position promptly.

Alright, that concludes today's lesson. In the next session, we will learn about the Vertical Spread Strategy.

How to use combo options to trade earnings season?
Combo options are option trades constructed from multiple contracts of differing options. Combo options enable more precise risk management techniques, offer the potential for higher returns, and reduce the margin requirement. ---------------- How do combo options work? Will you use combo options to trade upcoming earnings season?
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
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Comments

  • rL
    2023-10-09
    rL
    Win 20 Tiger-coins
  • koolgal
    2023-10-09
    koolgal
    Win 20 Tiger-coins
    🌟🌟🌟Today I learn the Covered Call Option Strategy which I use to generate income while holding a long position in a stock.  This is a good strategy to use if I believe that there is a moderate rise in the future price of the stock.
  • koolgal
    2023-10-09
    koolgal
    Win 20 Tiger-coins
    🌟🌟🌟The Best outcome of a Covered Call Strategy if when the stock price increases but remains below the call option strike price.
    If that happens, I not only gain from the stock price's increase but avoid the call option being exercised.  I get to earn the premium and generate extra income.
  • koolgal
    2023-10-09
    koolgal
    Win 20 Tiger-coins
    🌟🌟🌟The main disadvantage of using a Covered Call Strategy is the risk of losing money if the stock price drops instead of going up.  I also have to be careful to choose a higher strike price.  This strike price has to be higher than the expected increase in the stock price.   That way I would ensure a higher probability of capturing the premium income.
    • TigerOptionsReplykoolgal
      No worries, I understand options can get confusing at times. 
    • koolgalReplyTigerOptions
      Thanks for highlighting this.  As you can tell I am still learning😍😍😍
    • TigerOptions
      Hi, you actually profit from the covered call strategy when the stock price drops. The loss would be from the unrealised loss for holding the stocks.
  • koolgal
    2023-10-09
    koolgal
    Win 20 Tiger-coins
    A Big Thank You to @Tiger_Academy for this valuable lesson on Covered Call Strategy.  I would share it with my Tiger Friends too. @HelenJanet @Thonyaunn @CL_Wong @MeowKitty @Thonyaunn @Derrick_1234 @icycrystal @Shyon please join me in learning about Covered  Call Strategy 😍😍😍
  • Shyon
    2023-10-09
    Shyon
    Win 20 Tiger-coins
    Let's learn the coon type of portfolio strategy for options, which is known as Covered call option strategy. I learn that the  optimal outcome of this strategy is if the stock price increases but remains below the call option's strike price. This way, you not only gain from the stock's price appreciation but also avoid the call option being exercised, enabling you to earn the premium and generate additional income. Come and learn together guys @GoodLife99 @Aqa @b1uesky @icycrystal @Universe宇宙 @rL @koolgal
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