The Positives and Pitfalls of Covered Call Writing

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.

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