Writing covered call options means selling a person the right or option to buy your stock at a certain price (exercise or strike price), within a certain time period (expiration cycle). When you sell (write) an option on stock you already own, the option is "covered" by the stock you own; therefore it is referred to as a covered call option.
Writing Covered Calls Allows You To Make Money 3 Ways:
- If the stock goes up to the exercise price and is called (bought), you make the difference
between what you paid for the stock and what you received for the stock (the exercise price), PLUS the money you received for the option.
- If the price of the stock stays below the exercise price, you will make the money you received for the option, PLUS you will retain the stock and you can then sell another option and increase you cash flow even more.
- If the stock goes down less than the premium you received for the option, you will make the money you received for the option and you will have lowered the cost of your stock by the amount you received for the option.
In their booklet "The Value Line to Option Strategies", the esteemed investment service Value Line states:
"Curiously, the most attractive option strategy when returns are concerned in relation to risk is covered call writing. It provided profits over 20% a year with relative consistency and it is only about half as risky as holding a portfolio of common stocks."
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