Definition covered call options


If the stock price drops, it will not make sense for the option buyer "B" to exercise the option at the higher strike price since the stock can now be purchased cheaper at the market price, and A, the seller writer , will keep the money paid on the premium of the option.

This "protection" has its potential disadvantage if the price of the stock increases. If, before expiration, the spot price does not reach the strike price, the investor might repeat the same process again if he believes that stock will either fall or be neutral. A call option can be sold even if the option writer "A" does not initially own the underlying stock, but is buying the stock at the same time. This is called a "buy write". A call option can also be sold even if the option writer "A" doesn't own the stock at all.

This is called a "naked call". It is more dangerous, as the option writer can later be forced to buy the stock at the then-current market price, then sell it immediately to the option owner at the low strike price if the naked option is ever exercised. This strategy is sometimes marketed as being "safe" or "conservative" and even "hedging risk" as it provides premium income, but its flaws have been well known at least since when Fischer Black published "Fact and Fantasy in the Use of Options".

According to Reilly and Brown,: Two recent developments may have increased interest in covered call strategies: This type of option is best used when the investor would like to generate income off a long position while the market is moving sideways. A covered call has lower risk compared to other types of options, thus the potential reward is also lower. From Wikipedia, the free encyclopedia. Strategies for Profiting from Market Swings 1 ed. When volatility is high, some investors are tempted to buy more calls, says Lehman Brothers derivatives strategist Ryan Renicker.

It is more dangerous, as the option writer can later be forced to buy the stock at the then-current market price, then sell it immediately to the option owner at the low strike price if the naked option is ever exercised. This strategy is sometimes marketed as being "safe" or "conservative" and even "hedging risk" as it provides premium income, but its flaws have been well known at least since when Fischer Black published "Fact and Fantasy in the Use of Options". According to Reilly and Brown,: Two recent developments may have increased interest in covered call strategies: This type of option is best used when the investor would like to generate income off a long position while the market is moving sideways.

A covered call has lower risk compared to other types of options, thus the potential reward is also lower. From Wikipedia, the free encyclopedia. Strategies for Profiting from Market Swings 1 ed. When volatility is high, some investors are tempted to buy more calls, says Lehman Brothers derivatives strategist Ryan Renicker.

But volatility is also highest when the market is pricing in its worst fears Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Options finance Technical analysis. All articles with dead external links Articles with dead external links from August Articles with permanently dead external links.

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