How to Sell Covered Calls on Stocks
Writing covered calls is a popular option strategy for both novice option traders and experienced stock market investors. A covered call is the selling of a call option against stock that the investor owns. The risk of selling the call is "covered" by owning the underlying stock. Call options can be sold against stocks you already own or a complete covered call trade can be entered at one time.
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Instructions
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Covered Calls on Stocks You Own
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Look up the current price of your stock for the covered call trade in your online brokerage account. Near the stock price will be a link for "option chain." Select the link.
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Pick the call option to sell to complete the covered call. The option chains will be listed by expiration month. Pick an expiration between one and three months in the future. Look for the call option one strike price greater than the current stock price. The bid price is the price you will receive for the call options you sell. Double-click on the bid price to go to the option trading screen.
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Enter the order to sell option contracts. The option order screen should show the call option you selected. The order will be "sell-to-open." You can sell one contract for every 100 shares of stock you own. If the bid/ask spread for the option is greater than 5 cents, use a limit order to split the difference between the bid and asking price.
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Confirm the order is filled. You will receive the option price times $100 for each contract sold, minus any commissions. In a fast-moving price environment, your limit order may not get filled. If your trade is not filled in 10 minutes, adjust your limit price on the trade.
Stock plus Option Covered Call Trade
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Select the stock you want to use for covered call trading. Good covered call candidates have a moderate amount of volatility and actively traded options. Look for stocks with option-implied volatility of at least the market average and trade at least 200 at-the-money call options per day.
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Select the call option for the covered call trade from the stock's option chain page.
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Enter the covered call as a simultaneous stock-and-option trade. Your online broker will have an order screen for covered call trades. The order is entered with number of shares of stock, number of option contracts and a net debit price. For example, you would enter the stock symbol and 200 shares, the call option and two contracts. If the stock is $24 and the option is $2, enter a net debit of $22. The broker will fill the order with shares and option contracts to meet your net price.
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Tips & Warnings
Look up the current volatility of the market with the VIX symbol.
Call options can be written against stock holdings four to six times a year to generate income from the option premiums.
If the stock price moves above the option strike price, the stock will be called away and you will receive the strike price for the shares.
Use a covered call return calculator to compare the projected returns of different covered call combinations.
Covered call writing limits your upside profit to the call strike price if the stock zooms up in value.
If the stock drops in value, the call trade must be closed with a buy-to-close trade before the stock can be sold.
References
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