I use covered calls as my main trading strategy. I do so for several reasons.
- Steady profit
- Less risky than owning stocks alone
- Guaranteed profit from premium selling.
What is a Covered call? Covered call means that you buy certain shares of a stock and then sell equal number of options at a certain price (called strike price, or simply strike) with certain duration (called expiration). When you sell the call, the buyer pays a premium that is above the current stock price (this premium is called time value). Covered call sellers primarily make money by selling time value. The main feature of time value is that with the time goes by, time value decreases. Every thing on the Wall Street changes. One thing that never changes is that Time Value always decreases with the time going by. This is the where I make my money. Covered call, in essence, is similar to gambling house. In Vegas, gamblers lose money, but the house always comes out a head. In covered call, there are gamblers who bet that certain stock will increase in the future. The covered call sellers then make it possible for those people to bet. The gamblers may make money or they may lose money. But the covered call sellers always keep the time value. Covered call has its pros and cons. The main disadvantage of covered call, some of you may argue, is that when a stock goes up, I make only a small portion of the increase in the stock price. This, indeed, was the problem I had. But then later, I figured out how to deal with this problem: rolling up. With the rolling or rolling down, I have been able to deal with markets that either go up or come down. Please check out other case studies in this space to see how I use the modified covered call strategy to trade in bull, swing and even bear markets.
