Selling Covered Calls……….by Milton R. Levy

   Whoever invented OPTION TRADING was a genius.   Where else in the stock market arena can you have so many choices of actions to take.   Not only buy & sell, but buy back and sell again depending on which direction the market is going and with a much smaller risk and must less of an investment.   My trading model has been of two main types:  selling covered and selling uncovered (naked) calls.   For purpose of today’s blog I will consentrate only on selling covered calls.   I consider this the safest of all option trading.   I am not suggesting that you try this method.  I am only trying to enlighten those that are interested in learning more about this system of trading and investing.   In my next blog I will explain to the best of my ability what I have learned and done with uncovered (naked) calls.   But for now let’s talk about selling covered calls.

    First some important definitions.  A call is a right to buy a given stock from you at a future price (called the strike price) at a future date (called the expiration or strike date).  Expiration dates are the 3rd Friday of every month.  So if you sell the market a September call it will expire on the 3rd Friday of September.  An October call will expire on the 3rd Friday of October, and so on.   A covered call means that you own the underlying stock.   For example, you own 500 shares of XYZ Corp.   You decide that you want to sell someone the right to buy XYZ stock from you at $50 per share.  You initially paid $45 per share.   For the right to buy the stock from you at, let’s say for example purposes, $50, the buyer will pay you a premium.   The amount of the premium is listed on the option market chart and fluxuates throughout the day running almost parallel with the price of the stock.   If the stock goes up, the price of the option goes up.  Down brings a down price.  Ofcourse, the option price is much less.  If for example, the price of XYZ stock is $45 per share, the option price may range from 75 cents to $1.50 each depending of the way the stock has been performing and if there has been any business news or an earnings report.   As an owner of the stock you now can to sell “the market” the right to buy that stock from you and that is described as a covered call option.   The buyer pays you the premium (above example 75 cents to $1.50 each share).   The going price is listed on the option chart so you can see immediately what is being offered and then decide what it is you want to do.  You can go out further than next month.   Some traders go out 2, 3 or even 6 months.   Ofcourse, the further you go out, usually gives you a better premium on the option.  So from the above example of XYZ Corp. where I bought 500 shares at $45 per share, I have sold someone the right to buy it from me next month at $50 per share and they paid me 75 cents (or whatever the market calls for.)  I made $375 (less commission)  on the option and $5 on the stock (another $2500),  IF the stock never goes to $50.   If it closes below $50 on the expiration date then the option expires worthless and you still own the stock and can do whatever you choose to do.  Eighty percent of stock options expire worthless.  However, if the stock closes at $50 or above on the expiration date you have the obligation to sell the shares at $50 to the owner of the option.   Sounds complicated?   If you have any questions, please email me at mlevystreet@aol.com.   My next blog will talk about naked calls.  I hope you’ll find it interesting.