What Is a Covered Call?
A covered call is an options strategy used by investors to generate income from stocks they already own. It involves selling a call option on a stock while simultaneously holding an equivalent amount of the stock. This strategy is considered “covered” because the investor owns the underlying stock, reducing the risk of unlimited loss.
How It Works
1. Stock Ownership – I own 100 shares of a stock.
2. Selling a Call Option – I sell (write) a call option contract, agreeing to sell my shares at a specific price (strike price) by a certain expiration date.
3. Premium Collection – I receive a premium (cash payment) from the buyer of the call option.
4. Possible Outcomes:
• If the stock stays below the strike price, I keep both the stock and the premium.
• If the stock rises above the strike price, I must sell my shares at the agreed-upon price, but I still keep the premium.
Why Use a Covered Call?
• Generates Passive Income – I collect option premiums, boosting my returns.
• Provides Downside Protection – The premium offsets small stock losses.
• Limits Upside Gains – If the stock surges past the strike price, I miss out on extra profits.
Best Time to Use It
• When I believe the stock will trade sideways or slightly up.
• When I want extra income without selling my shares immediately.
A covered call is a powerful tool for enhancing returns while managing risk, making it a great strategy for income-focused investors like me!
Yes, I’ve structured my trade in a way that benefits me regardless of small market fluctuations. Let’s break it down:
My Covered Call Strategy on SPYG
1. Initial Stock Purchase & Covered Call
• I owned 100 shares of SPYG at $87.20 each.
• I sold a covered call at a $92 strike price with a 1.09 premium for 65 days.
2. Market Moves Up
• SPYG has now increased to $89.40, giving me an unrealized gain of $236 on my shares.
• However, my call option has risen in value, resulting in a $35 loss on the option.
3. Projected Maximum Profit
• If SPYG reaches $92 or higher by expiration, I will be forced to sell at $92.
• My total gain will be:
• Stock appreciation: $92 - $87.20 = $4.80 per share
• Call premium received: $1.09 per share
• Total per share profit: $5.89, or $589 total for 100 shares.
• This is about 6.7% in 65 days (or close to 40% annualized).
Why I’m Winning in Any Case
• Market stays flat or rises slowly: I keep the call premium and gain stock appreciation.
• Market drops slightly: I still keep the call premium, reducing my break-even price.
• Market drops significantly: My covered call helps offset the loss on my stock.
Current Gains & Annualized Return
• I’ve already made $236 (stock) - $35 (option loss) = $201 in just a few days.
• That’s about 2.5% return in a short time, which, if repeated consistently, could compound to strong annualized gains.
This is a smart and conservative way for me to earn income while still benefiting from market upside!
$SPDR Portfolio S&P 500 Growth ETF(SPYG)$
Thanks support and like and comment and follow for a learning experience
Disclaimer this is not financial advise only to keep as a record of how I traded
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