Sunday, July 12, 2009

Covered Calls - A Great Cashflow Strategy


What Are Covered Calls

For options traders, covered calls are the easiest and by far the safest strategy when dealing with options contracts. Essentially, covered calls are call options that have a backing of an underlying stock or share. In other words, if you sold x number of call options for XYZ shares, you also own that many shares of XYZ to cover for the event that you may get exercised. This is a great strategy for income generation of shares or stocks that you own.

The Income Generating Strategy

Basically, if you bought shares of a company, your money is locked away to that investment and not earning any interests in the mean time until you sell it at a higher price. If you sold call options for these shares that you own, you will receive a premium which you get to keep regardless of whether you get exercised or not. Thus, if you understand how options work and also understand how the share price have moved over the past few months, you will be able to use this strategy to constantly generate extra income until such time that you are ready to sell your shares.

The options trading strategy I would recommend for covered calls would be to find a strike price that is above your share purchase price, and ensure that there is a less probability of that price being hit or exceeded by expiry date. Another area to look at is also the premium amount that the market offers for that particular call options contract. You have to ensure that the premium is good enough such that if in case you get exercised, you have also received a decent amount to cover for the loss of potential capital growth of your shares.

Covered calls are great for bullish shares or bullish markets. You would ideally like to sell your shares and get options at a higher strike price, therefore this is perfect when the market is more or less guaranteed to rise, with lesser risk to the downside.

If you want more in-depth information on covered calls and options trading, Planet Wealth offers great educational materials and support, and have the expertise to show you how to trade options. Planet Wealth's team of experts also trade options on their own, and would only recommend options trades for those that they will trade themselves. Thereby, you can feel at ease with their expertise. Check out Planet Wealth's website for more information.