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What are Covered Calls?

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What are Covered Calls?

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First off, a call is an option. Technically, anyone who buys a call option is purchasing the right, but not the obligation to buy a parcel of shares at an agreed price, on or before a set date in the future. For example, let’s say Telstra was trading at $6.00 and you thought that the share price was going to rise. You could purchase a $6.00 call option with a one month expiry. This option contract gives you the right to purchase 1000 Telstra shares on or before the last trading Thursday of the next month. This option will likely cost approx $0.25 per share, or approximately $250. Now, if Telstra shares rose above $6.00 any time within the next month, say to $6.50, you could exercise your option and buy the 1000 shares at $6.00, thereby making a gain of $0.25 per share ($0.50 – $0.25 premium). That’s a profit of $250, or 100% return on your original $250 investment! Buying call options is a popular strategy, however it is risky as the underlying shares must rise in value or you could lo

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Call options give the option buyer the right to buy stock (from the option seller) at the strike price. Put options give the option buyer the right to sell stock (to the option seller). Call options are covered calls when you own the stock the covered calls are written against. Stock options are traded each business day in units of 100 shares; fractions of a unit can’t be traded. Writing covered calls gives someone the right to buy stock you own, at the option strike price. You can also buy stock with the intent of writing covered calls as soon as your buy is confirmed. This strategy is known as buy-write. Even though you have sold covered calls, you still own the stock until it’s called. If it pays a dividend you benefit. If it takes a dive, you could lose money. Make sure to research the stock underlying the covered calls thoroughly. When writing covered calls, the option premium from the sale is deposited into your account the next business day. It is yours regardless of what the st

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Done correctly, stock market investing can provide an excellent return on capital. One should, however, beware of arcane strategies, the promoters of which claim may yield outrageous returns far beyond what any conservative investor should expect. That said, covered calls are one of the more conservative strategies, and holds less risk than other options or derivatives mechanisms. In a straightforward stock transaction, you buy low, and wait for what you feel is the highest possible price at which to sell. In a covered call however, you agree ahead of time to sell shares at an agreed-upon price, called the strike price. On the other end of the transaction, another investor purchases an option, which is the right to buy your stock that that strike price. The seller of the covered call option earns a premium, which is paid by the option purchaser. The advantage to the covered call investor is that even if the stock does not reach the strike price and the options buyer does not exercise t

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One of the most popular strategies experienced investors used to boost their investment income is to write covered calls. This is a simple options strategy suitable for conservative investors wanting to generate a monthly income from their portfolio.

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