Covered Call Options – Making Money in a Down Market
Even when the stock market is down, you can still make money from your holdings by writing covered call options on them. How can this work? Let’s say you own shares in the Spartan sports card company, but although you’re confident it will trade well in the long-run, in the short-term you believe stock prices will remain flat. So you write an option contract for your shares in Spartan at its present market value; an option gives the holder the right but not the obligation to buy the stock. You then earn a premium fee from the option. If the price of the stock stays the same or falls, then the holder will obviously not exercise his option but you’ve made some money through the premium and you still keep the stock. Unfortunately, if the stock price then goes up you’ll experience an opportunity loss since you’re forced to sell your shares at the lower price if the holder exercises his option.
Keep in mind if you trade in covered call options that you don’t actually need to own the stock at the time you write the option; you can buy it at the same time – this is called a buy-write. But you should be aware of how much in commissions your broker may be charging you since this could affect the profits you make. Also, if you feel that the price of the stock is going up, you can exit the covered call at anytime simply by buying back the contract. Finally I like my software programs to help me so I read a ton of day trading software reviews. If you keep these simple tips in mind then you can successfully use covered call options to make profits even in a bear market.
Related posts: