The urge to earn more money can motivate
investors to opt for covered call
writing. By writing a call option for shares of a stock he owns, an investor is
able to earn extra money in exchange for the option of another trader to buy
the stocks at a pre-agreed price (also called the strike price). The buyer can
exercise the call option once the expiration date sets in. Buyers of covered calls
usually find stocks that have call options by using a covered call screener. Usually,
these buyers will exercise the call option if the value of the stock with a
call option becomes higher than the strike price. There are pros and cons of
call options that any investor should be aware of before proceeding with this
trading opportunity.
The main advantage of writing a call option
is that it provides extra income to any investor. Individuals with shares of
stocks may feel that the prices of their stocks won’t increase significantly in
the future. Instead of just keeping their stocks and earning nothing, investors
write call options so that they can earn additional income. Aside from earning
extra profits, investors still have the chance to retain their rights to their
stocks. This happens when the call option buyer decides not to push through
with the purchase of the stock because the stock value has remained flat or it
has become lower than the strike price.
However, a call option can backfire on
investors. After all, there is no certainty that the price of a stock will
remain flat or below the strike price set by the call option writer. The call
option writer is basically giving up on hope that the value of the stocks he
holds will skyrocket in the future. When the stock prices increase on or before
the expiration date of the call option, the call option writer stands to lose
the shares of stocks as the call option buyer will naturally exercise the call
option. Likewise, the call option writer will lose profits had he not wrote a
call option on the shares of stocks he once owned.
Though a covered call option is generally thought of as a conservative
investment strategy, it still has its risks as discussed above. Any investor
who is thinking of writing a call option for shares of stocks he owns should
carefully study his options before doing so. There are many traders who use a covered call screener to find stocks
with call options and these traders make calculated risks in buying call
options. Traders may increase their profits by working with a call screener,
such as the one available at barchart.com. This screener is available for a
trial period only at Barchart.
Brian Roy lives in Mesa, Arizona where he
is a freelance web designer. His interests include web design, shopping,
basketball, clubbing and the stock market. It is his latter interest that has
made him a top authority about stock market tips and tricks, including finding
the top stocks at authoritative websites like Barchart.
