When the stock market is volatile, I like to sell covered calls as part of my trading strategy. For reference, selling a call obligates me to sell the underlying stock at a specific (strike) price. The buyer of the call purchases the right to buy the underlying security at a specific (strike) price. When a call is covered, the seller owns the underlying stock.
Covered calls provide me the following benefits:
To get these benefits, there is an opportunity cost for using covered calls. I forgo any gains above the strike price since I am obligated to sell at the strike price. For example, if I sell a $60 call and the stock advances to $80, I am still obligated to sell at $60 and, therefore, do not get the $20 gain above $60.
Hence, I prefer to use covered calls at short term highs when a
stock is in a sideways trading channel. Thus, when the stock pulls back, I keep the call premium, wait for the stock to rally, and start the cycle again.
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This is not financial or investing advice. Please consult a professional advisor.Copyright © 2010 Achievement Catalyst, LLC
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