In this video, I discuss about covered call. Enjoy!
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How do options work
0:00 – Intro
0:18 – What is covered call
Covered call is a strategy where you sell a call option to another person, and you’ll get paid the option price. But in return, he is now able to use the option to buy 100 of your stocks at a fixed price. After selling, if the stock price remains below the option strike price, you get to keep your stocks. If the stock price rises above the option strike price, you will have to sell away your stocks to him at the strike price.
3:04 – Pros of covered call
By using covered call, you’ll be able to get additional income. For example, if you had just buy and hold S&P500 ETF in 2019, your return will only be 30%. But if you had sold a covered call, you will gain an additional 12% from selling options.
According to a study, 76.5% of options expire worthless, that means most of the time, you do not have to sell away your stock, and getting only free money.
4:29 – Cons of covered call
1 lot of options have 100 options. That means to sell a covered call, you will need to have 100 stocks to cover. Not everyone has 100 of S&P500 ETF, which is super expensive. But there are certain ETF of stocks that are cheap enough for you to do covered calls, like XLE, XLF, BAC, AT&T etc.
By selling covered calls, you will limit your upside. Because if the stock price rises above the option strike price, you are forced to sell at the option strike price, causing you to miss out on a lot of potential gains.