or out of the money covered call strategy. Otherwise, I’d sell an out of the money covered call. This is offset, however, by the reality that managing unexercised covered calls doesn’t generate as much income as new monthly trades. for more on covered call risk. Based on your overall wealth plan, you may find that you want income more than capital gains. is that stock and option commissions have gotten very cheap over the past two decades due to competition, especially with the ability to buy and sell securities online. As the striking price is lower than the price paid for the underlying stock, any upward price movement will not benefit the call writer since he has agreed to sell the shares to the option holder at the lower striking price. A fence is a defensive options strategy that an investor deploys to protect an owned holding from a price decline, at the cost of potential profits. In this case, the option buyer may or may not “exercise” the call option (buy the shares of Retire Corp) since the option strike price is the same as the market price on option expiration. While in the money covered call strategies may do best in declining stock markets, out of the money covered calls aren’t ideal either on declining stocks or etf’s. RMBS closed that day at 38.60, and there were 27 days left in the May options cycle (calendar days to expiration). She would be close to breaking even on the overall position if she sold her stock at option expiration. An in the money covered call strategy involves selling a call option with a strike price lower than the cost of the underlying stock. Does Living Off Covered Calls Really Work? This strategy is commonly used when the call writer expects the stock price to decrease, or to increase the probability of the option being exercised. The best times to sell covered calls … over the past 15 years from real estate, stocks, and online business. Unless Alex buys back the call option, what happens on options expiration depends on the price of the stock on June 15, the third Friday in June that year, so let’s look at that next. Deep In The Money … This was the market price when she sold an in the money call option for $1.40 with an $18 strike. If you enjoy researching stocks and easily find new ideas for covered calls, you may want all your covered call positions to get exercised so you can enter new positions more often. ♦Wealth Building Mindset♦ Always evaluate potential best and worst case investment outcomes, then accept and learn from what occurs. Let’s look at the third possible outcome at option expiration with her Retire Corp in the money covered call strategy. Note that if you’re new to stock charts, while technical analysis can seem daunting, very basic technical analysis can be an incredibly valuable tool for evaluating the best covered call strategies. Read my related post How to Create a Wealth Plan that explains this more. What I do, and what you should do, is invest using deep-in-the-money covered calls (DITM). And, of course, some stocks do well during bear markets. The deeper in the money the strike price is to the market price of the underlying security, the higher the premium from a covered call strategy. However, in order to compare a monthly or six week return to an annual return, such as dividend income of 3% a year, it helps to calculate covered call returns annualized. Now that risk from covered call strategies has been addressed, and how in the money covered calls can be the least risky strategy, lets’ see how an in the money covered call strategy, specifically, works, as opposed to other covered call strategies. After writing covered calls over the past 15 years, I have found that there are times when an in the money covered call strategy works better than an at the money or out of the money covered call strategy. Sometimes you can even find a deep in the … The income generated from selling covered calls usually ranges at least two to twenty times that of typical dividend income! Alex can sell a call option for two or more months out, increasing the option premium by increasing the time value. Likewise, new covered call trades each month tend to generate more income, easier. Then let’s look at how an in the money covered call strategy works and a specific in the money covered call strategy with the three potential profit or loss outcomes based on the underlying stock price at the option the expiration date. As you can see in Figure 1, it would be possible to sell a May 55 call for $2.45 ($245) against 100 shares of stock. Like Ali, you may have checked a stock chart and seen that the stock is at the high end of the recent trading range. Selling in the money covered calls can be an excellent, In the money covered calls, however, tend to be the. Remember, the prior month, the stock was at $18.50. And these higher premiums lower the biggest risk of using covered call strategies: risk of the underlying stock dropping due to either the overall market or stock specific bad news. And who doesn’t want higher income for the same amount of capital at risk? The option buyer could simply buy the stock for less than the strike price of $18 so there would have been no reason to exercise the option. Read my related post Problems with Covered Calls. Again, it’s important to first note that investors who own stocks without covered calls, especially stocks that don’t pay dividends, also suffer during bear markets. Based on your overall wealth plan, you may find that you want income more than capital gains. 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