How to write a covered call option (go short)

If you want to get small but steady profit from your stock holdings, consider writing covered CALL options against them. As an option writer, your profit potential is limited and risk is theoreticaly unlimited but since you are covered with your stock position it amounts to loss of opportunity (to sell your stocks at a higher price). The worst thing it can happen is that your get assigned exercise and your stocks get "called away" from you at a pre-arranged strike price (that you picked) while at the same time in the market your stock would be worth much more.

Ask your online brokerage service if you can write covered calls against your stock positions. If they do not offer this service, find a brokerage service that does and transfer your stocks there

Find out which of your stocks are optionable. Usualy all the major large cap stocks are. You'll have to have 100 shares for each option you write. Decide what strike price you want to write your calls at. You will be safer with high out-the-money strike but you will get less money than for at-the-money or in-the-money strike that carries more risk but also brings more money. Basically your goal is to collect the premium while keeping your stocks intact and repeat that as many times as you can. For that you do not want the price of stock to rise above your call option strike price.

Decide which expiration month you want. Further the month, more expensive your call gets, which in this case is good for you because you are selling this call and collecting the premium. However, longer option gives more time to buyer to get in-the-money with your option.

Sell your option into market with order "sell to open". You get credit on your account right away. Ideally your option will expire worthless in the buyers hands and you will get to keep that whole premium. If the price of your stock is rising and getting close to your strike price, you can close the position with "buy to close" order. Worst case scenario your stocks will be called away and you'll have to sell 100 stocks for each option you wrote at your strike price.

Tips

  • You are the original creator of an option, the writer of a covered call Covered call writing against your stock portfolio can bring slow and steady income every month Most options expire worthless so chance is at your side To avoid getting assigned (exercised) pick strike prices that are higher (further away) from the current price of the shares

Warnings

  • Your profit is limited and your theoretical risk is unlimited (because there is no limit to how far the stocks can rise - in reality you lose the opportunity to sell your stocks higher than what you are commited for with your strike price) be very conservative and pick options that move slowly most people lose money trading options option trading is extremly risky

About the Author

experienced individual trader (10 yrs) of stock and index option trading..you know - calls and puts and strangles and straddles and condors and butterflies etc. ..you got the picture.. blog (theme: options) with 150K visits