Selling a call option

Summary:

Selling a call option when you already own 100 shares of the underlying asset is a strategy known as a covered call. This strategy has several potential benefits:

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  1. Income Generation: By selling a call option, you receive a premium from the option buyer. This premium provides an additional source of income on top of any dividends you may receive from owning the underlying shares.

  2. Limited Risk: Since you already own 100 shares of the underlying asset, the risk of the covered call strategy is considered limited. The call option you sold is covered by the shares you own, providing a buffer against potential losses.

  3. Enhanced Returns: If the price of the underlying asset remains below the strike price of the call option until expiration, you keep the premium received from selling the call. This premium adds to your overall returns from holding the shares.

  4. Reduced Breakeven Point: The premium received from selling the call option effectively reduces the breakeven point for your shares. This means that even if the price of the underlying asset falls slightly, you may still have a profitable outcome when factoring in the premium.

  5. Portfolio Protection: While the covered call strategy doesn't eliminate all risks, it provides a level of downside protection. The premium received from selling the call option partially offsets potential losses in the value of the underlying shares.

  6. Customizable Strategy: You can choose the strike price and expiration date of the call option based on your market outlook and risk tolerance. This flexibility allows you to tailor the strategy to your investment goals.

  7. Participation in Upside Gains: If the price of the underlying asset rises but remains below the call option's strike price, you continue to benefit from the appreciation in the stock's value, and you keep the premium received.

It's important to note that while the covered call strategy has benefits, it also has trade-offs. One trade-off is that your potential for large gains is capped because you have an obligation to sell the shares at the strike price if the option is exercised. Additionally, in a rapidly rising market, you may miss out on significant upside potential beyond the strike price of the call option. As with any options strategy, it's crucial to carefully consider your investment objectives and risk tolerance before implementing a covered call

CLiK Trading Education Ltd
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