Covered Calls
Buying a stock and selling calls at a strike price above the price at which you purchased your stock or the current stock price. This is commonly regarded as the safest of the options trading strategies. If one is taking a position in a stock for the long term, selling options is a way to make some income supported by that stock position. In exchange for that the premium received, the upside of gains to the stock are limited.
Objective:
- Risk minimization
- Income
Example:
You are own 100 shares of Apple stock that cost you $350 a share. You sell one
options call contract with a strike price of $400 and expiry 3 months out and
collect a premium of 17.50 a share. When expiry comes around, the stock price
of the underlying is $370. You keep the premium. In total, you have gained
17.50 from the premium plus another $30 per share from appreciation in the
stock price. Your gains on the stock would have been capped to $50 had the
underlying appreciated above $400.
Naked Calls
In contrast to covered calls, naked calls involve selling puts or calls with
holding the underlying stock. Naked calls are much riskier than covered calls
as your losses could theoretically be unlimited. Naked options selling are an
advanced strategy and one that is not recommended for new traders.
