Digging Beneath the Surface of This Popular Income Strategy

[Trading With Larry Benedict]( Digging Beneath the Surface of This Popular Income Strategy By Larry Benedict, editor, Trading With Larry Benedict Many traders are familiar with a “covered call” option strategy… You can write (sell to open) call options on a stock you own to generate extra income. If it’s a stock that is already paying a healthy dividend, you can really boost your returns. Yet sometimes traders aren’t always sure when to use a covered call strategy. So today, I want to look at some of the factors to consider before putting this strategy into action. A Neutral Strategy With options, you always need to understand your obligations – and this strategy is no exception. By writing a call option, you’re required to hand over your shares at the option’s strike price if your call option is exercised. So you should only write your option at a price that you’re willing to sell your shares. But what might seem like a good price today could change quickly if the stock rallies. That’s why you only use a covered call if you are neutral on a stock. Recommended Link [He Declined to Go on CNBC – Now He’s Finally Revealing His “Millionaire Secret”]( [image]( During the 2008 financial crisis, millionaire trader Jeff Clark stunned the world when he managed to double his readers’ money 26 TIMES… CNBC caught wind of this and asked Jeff to come on live TV to explain his secret. Jeff politely said no. And now, years later, Jeff is back to finally bring this secret into the light. …Revealing how anyone can collect returns of huge gains in just 8 days… in bullish AND bearish markets! And why you need to IGNORE 99.9% of the market, instead focusing on only ONE stock. [(ticker revealed here)]( Jeff says: “I am tired of watching as investors lose their shirts buying risky assets… even my OWN SON lost -60% in crypto & tech stocks… now I’m going to give him a [“Financial Intervention”]( to help him win his account back in 2023!” [Click Here to Watch Jeff Demonstrate This ONE Stock Secret.]( -- Put simply, if you’re bullish on the stock, then leave this strategy alone. It’s a similar story if you are bearish… While collecting call option premium might cushion some of your losses, 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. Ideally, the best time to sell a covered call is when a stock is trading in a sideways range, such as the Boeing (BA) chart below. (Please note that this example is not a recommendation.) Boeing (BA) [Image] Source: eSignal After bottoming out last October, BA rallied strongly at the start of this year. As you can see, from there, it transitioned into a sideways trend. In this example, you believe that BA is going to remain trading in this range. So you might write your option at around $225 (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 will receive. But this also increases the likelihood that your option will be exercised. If you wrote this option in June when the option strike price was close to the stock price, that could have generated around $10 per share (or $1,000 per contract) on an option with around 45 days until expiry. As long as the underlying stock closes beneath the strike price at expiration, you get to keep this premium and your shares. That’s the ideal scenario. Do this repeatedly over six months or longer, and those premiums can really start to add up. As I mentioned, though, you always need to understand your obligations… 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. Other Considerations In this case, if your written call option is exercised, you must hand over your shares at the option’s strike price – no matter how high the underlying shares are trading. The other thing you need to consider is volatility… You want to sell when volatility is high. This inflates the value of the options and puts more money into your account. Then as volatility dies down, it reduces the value of the call option. (Don’t forget that because you’ve sold the call option, you want to see its price fall.) And time decay is one other factor to consider. Remember, time decay lessens the value of your options contract. The closer your option gets to expiration, the quicker the value degrades because there’s less time to realize a profit. Here, it works in the option writer’s favor, and it can help swing the covered call strategy your way. Regards, Larry Benedict Editor, Trading With Larry Benedict Mailbag Are there other options strategies you’d like to see us feature in an essay? Let us know at feedback@opportunistictrader.com. IN CASE YOU MISSED IT… [Over 1,400 Institutions Currently Collecting “Amazon Payouts”]( BlackRock, Vanguard, Citadel, Ray Dalio, and George Soros... Along with over 1,400 institutional investors collected over $17 billion in payouts from a unique investment I call: “Amazon’s secret royalty program...” And, according to our research, they’re set to collect as much as $3.2 billion in payouts this year alone... It’s all thanks to [a ‘wrinkle’ in the U.S. tax code]( (buried on page 1,794, in section 561)... 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