This Old Fashion Option Trading Strategy Still Works

Options are becoming more and more popular among investors. The recent spike in volatility combined with stocks hitting all time high after all time high has reignited interest in the derivative markets.

Option trading strategies can be used to earn profits and to protect profits. There are literally 100’s of strategies that can be employed depending on your goals and market conditions at the time.

One of the simplest strategies is called the covered call. Experienced traders will recognize that the covered call strategy has the exact same risk parameters as selling a put. With that said, let’s take a closer look at the covered call option trading strategy.

The basic idea is that you buy a position in a stock while selling call options against the position. Hence the term Covered Calls. Your call option sale is covered by the underlying stock position.

The ratio of call options to stock is 100 shares to 1 call option. This is because every individual call option represents 100 shares of stock.

Looking at the strategies risk reward situation, your maximum profit is limited and the maximum loss is substantial. You want to put on the position in market environments of decreasing or neutral volatility. Increasing volatility has a negative effect.

Many traders use the covered call strategy to increase yield on the underlying stock. You see, with covered calls you are getting to keep the premium earned by selling the call, but this limits your upside potential in the stock. The seller of the call gets to keep the premium whether or not the option is exercised.

You can sell covered calls to help offset the risk of a long stock position or to increase the yield of the underlying stock. There are a variety of variations on the basic theme.

SOURCE: http://tradingtips.com/daily/options-trading/old-fashion-option-trading-strategy-still-works/