Selling Covered Calls For Income
By Stock Options Channel Staff
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Who out there is willing to pay me for doing this, you might ask? Because strike prices are sometimes very far
away from the current market price of the stock, it can initially be confusing to think about the reasons someone
would utilize the options market, versus just trading shares of the stock directly. But there are lots of different
reasons someone might want to buy a call option from you even at a price above where the stock presently trades,
just as there are many reasons motivating both the buying and selling of a share of stock.
For instance, someone who is short the stock from a higher price of 15 and is now sitting with an unrealized gain
with the stock at 9, may want to protect that gain by purchasing the option to close their short (by buying the stock)
at 10. Or someone might think the future looks so bright for the stock that they want to make a straight out bet
that the stock will rise (if the stock trades at 9 now but rises to 15 in the future, they can make a
lot of money buying the call option today at the 10 strike which would then be 5 dollars "in the money" if the stock
were to rise to 15).
Hopefully by now the idea of selling a call is starting to make some sense, as compares to placing a limit order to
sell a stock. One important difference is that if you were to place your sell order at 9.99 and the stock rises
above 10 tomorrow, you will have gotten your fill and cash now sits in your account where you once had stock. But if
you sold the 10 strike call option with an expiration date off in the future, you don't automatically exit the stock
now that it has traded above 10. Because
remember, the person who paid you for your commitment to sell at 10 has the option to "exercise" that contract
(and buy the stock from you at 10) but still has all the way until the expiration date to do so. If the stock is
still above 10 at the expiration date, then they would be much better off buying from you at 10 than taking the
market price, and the cash will appear in your brokerage account after expiration date (and the corresponding stock
will disappear). But if the stock rebounds falls back below 10 and remains below 10 at expiration date, then
they are much better off buying at the market price. In that scenario, you will still own the stock, plus you will
still have received the premium collected in the beginning.
Within the pages of Stock Options Channel having to do with call options, you will see the term "YieldBoost" which was
designed to express the premium a call seller can receive in terms of the extra yield that premium provides against
the trading price of the shares, in the scenario that the option expires worthless. In other words if you were to
purchase the stock at the present market price, then sell the call, and keep the premium (if the call expires
worthless), the YieldBoost represents extra yield against the original share price — the boost — delivered
by the option premium.
Using the box labeled "Enter Symbol" at the top of the Stock Options Channel website, you can input a stock ticker
symbol, and click the "Get Options Chain" button to see what options are available for that symbol. The various
expiration months will be listed, along with links to view options chains designed with selling calls in mind (also,
selling puts for income). Clicking one of those links for the calls will
bring up a table showing the different strike prices available, and will show the current bid (the premium a buyer is
currently willing to pay you to sell them a call), the YieldBoost that bid represents (both total and annualized), the
current ask, last trade, today's volume, the total open interest, a technical-analysis calculation of the current odds
the contract will expire worthless, and finally the total return from the current share price if you were to sell the
call and end up selling the stock (in options jargon: "if your stock gets called away").
The "odds" calculation is entirely an automated technical analysis (as opposed to a fundamental analysis) of the
underlying stock, using purely the observable quote data both past and present, including some fancy terms known as
"the greeks" (delta, gamma, vega, and rho). No fundamental business-level data for the company itself is considered,
and observable market data past and present is never a guarantee of future price movement. So this is presented
merely as a research tool investors can utilize in combination with other forms of analysis.
We also apply our YieldBoost formula to a ranking system that scours the options market for those contracts with the
highest YieldBoost a call seller can receive, with strike prices that are out-of-the-money with low odds of the stock
being called away (the results of this ranking system are meant to express the top most ''interesting'' options
identified by the formula, which are meant as a research tool for users to generate ideas that merit further
research).
Each week we put out a free newsletter sharing the results of our YieldBoost rankings, and
throughout each day we share even more detailed reports to subscribers to our premium service, but any site visitor can browse through some of
these lists under the YieldBoost Ranks tab at the top of the website, where ranks are presented by
industry, as well as featured slideshows containing the top YieldBoost options of the Dow Jones Industrial Average
components, the S&P 500 components, and certain high-yield sectors including Real Estate Investment Trusts (REITs) and Business Development Companies (BDCs). Some
other interesting slideshows are featured as well, such as top YieldBoost options of stocks with recent secondary
offerings, stocks conducting share buybacks, and stocks with recent insider buying.
We hope you have found this page educational and useful, and we thank you for visiting Stock Options Channel. A
reminder that market data is inherently error prone, and none of the information presented on our website should be
considered to be free of errors or relied upon for any investing decisions. None of the information contained herein
constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable
for any specific person. Please read our full disclaimer statement.
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