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Covered calls is the name of an options strategy. In the case of a share investor, it involves both owning shares and selling call options over those shares. The main benefit of the strategy is that it generates income for the investor via the sale of the options.

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One Method for Profiting in this Tricky Market
This market reminds me of a few years ago leading up to March 2005, where every bounce was an invitation to short sell (up until the final low was made). That market provided me with one of my better stretches of consistent profits, ironically with somewhat small position sizes.

The cost of a call and the cost of a put are almost directly related. If you have a $40 stock, a $40 call and a $40 put will be almost exactly the same price most of the time. If there is a difference, the possibility of an arbitrage usually exists meaning that there is a 0 risk strategy (minus commissions) to get something for nothing. This is true whether it’s a collar or another strategy. I don’t completely understand the full process that allows for that to happen, but a complex series of trades usually makes it possible. So if the price of a call and put are going to be the same that means generally the higher priced calls are due to greater risk. Some reasons may be historical volatility, as that plays a roll, but the implied volatility, that is, how much people expect or are betting on the stock to move, becomes important.

A covered call strategy within a cycle will require people to sell options against the stock. If the stock is above the strike price, the stock will be “called” away. The seller receives the premium, but the owner of the call receives the shares at the strike price. There are various strategies involving this covered call strategy.

Let’s discuss the complexities of options and how they differ from trading stocks. First of all stocks are simply one-dimensional trading vehicles, the dimension of “price movement.” For example, one can go long a stock if he/she is forecasting a rise in the price of the underlying asset. The stock trader doesn’t need to worry about time or changes in volatility affecting the outcome of his trade. The stock trader only needs to focus on the asset’s price movements.

Wow! I can’t believe how interesting the stock market is these days. Many people, including me, have given up trying to predict the direction of the market. Happily, I’m now in the position to say “Who cares!”

Most options traders view stock options as only a short term trading strategy. This is because the idea of a highly leveraged bet with the potential to make big bucks quickly appeals to the gambler inside all of us. Just like a card counting black-jack player, options strategies can be used to make consistent short term profits, provided the trader is careful, and knows what they’re doing. But while options are usually employed solely by that clique of high-risk, high-reward traders, they actually have enormous benefits that tend to go unnoticed by many a long term investor.