A covered call, otherwise called a “call option” or a “put option”, is a form of contract that involves the right to purchase or sell a certain security or asset on the specific date that is immediately preceding that option’s expiry date. A covered call is essentially a financial contract in which the holder of call options is the purchaser of the underlying asset, for instance shares of stock. The amount of this option may be expressed in a range and may also be set with a strike price.
This type of option is similar to a put option, however, there is an important difference in how the value of a call option and a put option are determined. An option on a stock is given a strike price by the company whose stock is being sold, either by the issuing company or by an underwriter. If the purchaser of the option agrees to buy the stock at the strike price, then the option is considered “covered.” If the holder of this option decides not to buy the stock at the strike price, it is called a covered option.
Stock market professionals and investors have learned that the price of stocks will change based upon several factors. The most common is economic events. For instance, if the United States economy receives a shock, the United States stock prices will usually drop. Likewise, if the world economy experiences an economic depression, the world stock prices will likely drop as well. These movements are known as “black swans,” and they can make some investors and stock market professionals nervous.
For this reason, some companies issue “call options” to their shareholders. The underlying assets that a company plans to purchase will be covered by the option. Investors who sell their call options will not receive the profit from the sale until they exercise the option by selling the underlying asset. At this time, they will receive an amount equal to the cost of selling the option plus their premium, if any, so they will be paid the amount they are owed when the option expires.
Different options on a particular stock may have different expiration dates. For example, a three-year option will expire upon the third anniversary of the day that the option is originally issued, while a ten-year option will expire upon the tenth anniversary of the first date of purchase. Call options are generally bought by companies that have significant investments in the underlying stocks.
A large number of people buy stock options in order to gain a profit in the stock market. Many of these investors hold these options to cover a certain investment they plan to make.
As mentioned from Day Trade Methods website, many investors that invest in stocks purchase covered calls. in order to protect themselves when the stock prices drop. However, this strategy is not always the best strategy.
As discussed previously, stock market professionals advise against buying covered calls, especially if you want to earn more profits when the market falls. The reason why stock market professionals discourage buying these options is because of the potential loss that you will face when the market falls. Most stock market professionals also caution that when the market rises, you should purchase other types of options, as opposed to covered calls, in order to protect your investment. When the stock market drops, you should use covered calls to protect your investment.
Covered calls are usually purchased by companies who do not want to invest in their own shares. They buy the option to purchase the underlying asset at a lower price than what they own it for the option period. When the option expires, they must then sell the asset at the lower price or exercise the option, thereby avoiding the loss of their investment. If you have options on stocks, you may want to consider purchasing a covered call option when the stock prices fall, instead of holding on to the shares.
One of the major benefits of owning a call option is that you do not have to wait until the stock prices have fallen. You can purchase the option in anticipation of falling stock prices and place a call in your trading account right away. This strategy can result in a large profit, provided you purchase the call when the prices are low and wait until they begin to drop.
It is important to know the risks involved in purchasing covered calls. It is also important to be aware of the potential losses that you may suffer if you do not properly analyze the market. There are many resources that can help you understand the pros and cons of this type of trading.