WHAT ARE COVERED CALLS?

 

Covered Calls are a type of options strategy. Investors use covered calls to generate cash flow on stocks they already own. This is accomplished by selling the right to purchase (Call Option) the stock owned by the investor at a specified price (Strike Price) which is above that stocks current price. The risk to the owner of the stock is missing out on upside above the strike price. 

Covered calls are a common first strategy investors employee when starting with options. They are not a get rich scheme but can help to increase crease returns as part of a disciplined investing strategy. 

 

The Mechanics

Before investing take the time to understand the mechanics of covered calls. Fidelity has a great introductory article on the topic. 

Mechanics of Covered Calls

 

Setting up an Account

First determine if options and covered calls are appropriate to your goals and skill level as an investor. Next you will need to open an investment account and get approval to trade options. The SEC's investor bulletin has more info on setting up an options account.

Opening an Options Account

Make the Right Call

Covered calls are not a free lunch. You should not sell a call for every stock you own. The downside to selling a covered call are that they limit your upside. Option Value Finder helps you quickly determine if a covered call is right for your stock.

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