Covered call writing is considered as one of the safest trading strategies. As it is shown in the rule is that you can buy the underlying stock and then sell them on call options. You can sell out-of-the-money, money-in-or on-the-money each with different results, depending on current market conditions and expectations.
The acquisition requires considerable amounts of capital. If the current share price of say, $ 40 will cost $ 4,000 to 100 shares in the United States buy, you can only write a call option contract on them. If you want to write 10 contracts, these shares are priced at $ 40,000. Not everyone has a lot of risk on a trade only.
But what if there is a cheaper option, just to achieve the same effect as the call is closed, but for a fraction of the cost. What is call writing strategy such as this appeals to you insured?
Here’s how:
Instead of buying back shares, buy a call option deep-in-the-money by at least one year to maturity. This is called a “leap of choice.” With deep-in-the-money, we mean the exercise price must be more than 10 percent of the stock price be at-the-money. So in this example that we, if the underlying stock is trading at $ 40, then we want to buy call options at least $ 4 on-the-money, ie with a base price of $ 36 or less.
So, let us apply the covered call writing examples of the work.
We have the decline in stocks at around $ 40 recently, with high volumes and we hope that in the near future, accompanied seen in a range trading. We can buy a multiple of 100 shares at $ 40, or vice versa, we can buy $ 32 call options with one year of expiry. Because it ITM in the delta is very high and most of the value of this option would be the intrinsic value with the value a little time. Call options $ 32 $ 8 in money and it cost us $ 9.40 instead of $ 40, we pay for the shares. This enables us to buy more of them or less risk capital.
At 10 long call option contract to buy this price us costs $ 9400 instead of $ 40,000.
At the same time, we also sell the 10 on-the-money call option with a strike price of $ 40 and only a month after. We were given $ 130 for each contract that we sell, for a total amount of $ 1300
Possible scenarios Covered Call Select the date of expiry of the near months in writing:
1. Share prices under $ 40.
In this case, the option will expire worthless sold and we are still $ 1,300. We still keep our $ 32 call option and we now sell more to come ATM call option in the next month.
2. The share price of just over $ 40.
We then buy back the call options sold and immediately sell more calls at higher strike price to come next month, a gain in the process.
3. The stock price has a strong move upward to make about $ 50
Call options sold now are far-in-money-and we are $ 10 per share, so we will be forced to sell the shares for 40 dollars if the market price of $ 50 is his funds are exposed. But at the same time, our $ 32 call option is now $ 18 on-the-money.
So we closed the second position. We made a profit of $ 18, plus a certain time, the choice of $ 32 and $ 10 to lose option sells for $ 40, representing a net profit of around $ 8.75. We also received another $ 1,300 from the sale of call options is $ 40.
Overall, within one month of the covered call writing strategy, we have made a profit of $ 750 (75c x 1000) + $ 1,300 = $ 2,050 to invest up to $ 9400 from 21.8 percent for the month.
We then decide whether more in the ITM call options on stocks based price is now $ 50 and buy sale near from month ATM option again, or to another camp. Our decision will remain on the basis that think that we, the future direction of stock prices stable or falling sharply again.
Writing covered calls for a strategy of low risk alternative to traditional closed calls. Options sold are “closed” by the deep ITM options instead of the underlying shares themselves