How to Put This Popular Income Strategy Into Action

[Trading With Larry Benedict]( How to Put This Popular Income Strategy Into Action By Larry Benedict, editor, Trading With Larry Benedict Many traders are familiar with the “covered call” option strategy. You can write call options on a stock you own to generate extra income. Yet when you’re starting out, you might not be sure when to use a covered call strategy. So today, I want to look at some factors to consider when putting this strategy into action… Recommended Link [Millionaire Investor makes surprising election prediction]( [image]( Louis Navellier says he knows who’s going to win the election. And how they could send [six specific AI stocks through the roof on their first day.]( [Learn more.]( -- A “Neutral” Strategy With options, you always need to understand your obligations. And this strategy is no exception. If the buyer exercises your call option, you’re required to hand over your shares at the option’s strike price. For example, say you own 100 shares of a stock and sell a call option with a $50 strike price. If the stock is trading at $55 before expiration, the person who bought your option will exercise it. Then you’ll have to sell them your shares for $50 a share. So you should only write your option at a strike price that you’re willing to sell your shares. But what seems like a good price today could change quickly if the stock rallies. That’s why you only use a covered call if you’re neutral on a stock. Put simply, if you’re bullish on the stock, then leave this strategy alone. It’s a similar story if you’re bearish. Collecting call option premium might cushion some of your losses. But it’s not going to cover all of those losses if a stock falls heavily. In that situation, you’d sell your shares directly or protect them by buying a put option. (In either case, consider any tax implications. And decide what best suits your financial needs and goals.) When to Write a Covered Call Ideally, the best time to sell a covered call is when a stock is trading in a sideways range. You can see that with Hershey (HSY) in the chart below. (Please note that this example isn’t a recommendation.) [(Click here to expand image)]( After bottoming out last December, HSY transitioned into a sideways trend. In this example, you believe that HSY is going to remain trading in this range. So you might write your option at around $200 (red line). There’s a key thing to remember here… The closer you write your call option to the current stock price, the more premium you’ll receive. But this also increases the likelihood that the buyer will exercise your option. Let’s say you wrote this option in mid-April. Free Trading Resources Have you checked out Larry's free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just [click here]( to check it out. The $180 stock price was well below the $200 strike price. That could have generated around $2.00 per share (or $200 per contract) on an option with around 45 days until expiry. But if you write this option today, the strike price is closer to the stock price. So you could generate around $4.50 per share (or $450 per contract) on an option with the same time horizon. Remember, you want the stock to close beneath the strike price at expiration. Then you get to keep this premium and your shares. That’s the ideal income scenario. Do this repeatedly over six months or longer, and those premiums will really start to add up. Regards, Larry Benedict Editor, Trading With Larry Benedict [The Opportunistic Trader]( The Opportunistic Trader 55 NE 5th Avenue, Delray Beach, FL 33483 [www.opportunistictrader.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This editorial email containing advertisements was sent to {EMAIL} because you subscribed to this service. To stop receiving these emails, click [here](. The Opportunistic Trader welcomes your feedback and questions. But please note: The law prohibits us from giving personalized advice. To contact Customer Service, call toll free Domestic/International: 1-888-208-6550, Mon–Fri, 9am–5pm ET, or email us [here](mailto:feedback@opportunistictrader.com). © 2024 Omnia Research, LLC. All rights reserved. Any reproduction, copying, or redistribution of our content, in whole or in part, is prohibited without written permission from Omnia Research, LLC. [Privacy Policy]( | [Terms of Use](