Stock covered calls are a strategy used by stock market investors to generate extra cash from stocks they currently personally own in their investment portfolios. Although options trading may seem daunting, this technique for generating income is in fact so careful that a lot of stockbrokers will even permit you to employ this strategy inside your online Individual Retirement Account (IRA).
A call option provides the buyer the right to purchase a pre-determined quantity of an asset, usually a stock or commodity, for a specific price (strike price), upon or even prior to the expiration date belonging to the option contract. A covered call option is a standard call option where the seller is actually protecting using securities that are currently held as part of his trading account. Stock covered calls are merely standardized call options which are secured with the shares of stock that are already possessed within the sellers stock trading account. Because each and every option contract represents 100 shares of stock, these types of covered option calls can only be sold (also called writing a call option) based on whole 100 share increments of the base stock that the option has been written with. For example, if the investor owns 670 shares of Cisco Systems (CSCO) in their account, they would be able to write (or sell) 6 stock covered calls.
Given that we've gone over exactly what stock covered calls are, let us look at how you can utilize them. Let us proceed with the illustration of the investor with 670 shares of CSCO in their stock market trading account. Considering that CSCO does not pay a dividend, as well as the investor wants revenue without having to sell his stock, he decides to sell call options that will expire in 2 months, for a price that's over today's stock price for CSCO. In return for this option, the trader receives $ 1 per share, or $ 100 for each covered option calls contract, times Six contracts equals $ 600. This cash is deposited directly to the traders trading account, and may be used for whatever objective the investor chooses. The investor is now obligated to sell the contract holder 600 shares of stock at the price specified inside the contract, upon or prior to the expiration date for this contract.
Now should the stock price does not move above the contract strike price, the trader who sold the option contracts keeps his stock, as well as the cash he got through selling the stock covered calls, and may do it all over yet again on the trading day after the contract expires. This can be a extremely effective idea, because it means that the investor may earn extra income several times per year simply by selling these call options.
If the stock closes above the price specified in the contract, ordinarily around the date the contract expires, the contract will be exercised by the option owner, and the trader must sell him the 600 shares of CSCO at the price specified in the option contract. Since the contract price is over the price which the stock had been trading at when the options had been sold, the trader will get that capital gain profit, plus the money which he had been paid for selling the options.
Although stock covered calls may well appear slightly difficult in the beginning, ultimately they give you a relatively easy approach to create income on stocks that may otherwise just be resting in your investment account.