Key terms for options strategies<\/h3>- Call option (\u201ccall\u201d):<\/strong> Gives you the right, but not obligation, to buy<\/strong> an asset at a specific price by a certain date.<\/li>
- Put option (\u201cput\u201d):<\/strong> Gives you the right, but not obligation, to sell<\/strong> an asset at a specific price by a certain date.<\/li>
- Strike price:<\/strong> Price at which an option can be exercised \u2014 when you can buy or sell the asset.<\/li>
- Market price:<\/strong> Current buying or selling price of an asset.<\/li>
- Options spread:<\/strong> A single transaction involving buying or selling multiple options contracts with different strike prices or expiration dates.<\/li>
- Premium:<\/strong> The price you pay to buy an options contract (or the amount you receivfe if you sell one).<\/li><\/ul><\/div><\/article>
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1. Covered call strategy<\/h3>
The covered call strategy involves selling call options on stock you own. If the stock doesn\u2019t reach the strike price, you profit from keeping the option contract fees. But you have to sell your stock if the strike price is reached and the buyer decides to buy.<\/p>
The covered call strategy is most successful when the stock price rises but doesn\u2019t reach the strike price, leaving you with fees for a contract the buyer cannot exercise and stock you can sell at a higher price.<\/p>
Use this strategy when you expect the stock price to stay flat or rise slightly.<\/p>
How to use the covered call strategy<\/h4>- Buy stock. <\/strong>Options contracts are typically bought in multiples of 100, so you don\u2019t have to buy if you already own 100+ stocks.<\/li>
- Sell call options.<\/strong> Selling a call option means you give a buyer the right to buy your stock at a specific strike price by a specific date (but the buyer may choose not to do so).<\/li>
- Collect the contract fee.<\/strong> Collect the option contract fee from the buyer. To increase your odds of keeping both the contract fees and your stock, choose a strike price above the current market price and a contract expiration date at least one month in the future.<\/li><\/ol>
Strategies for option trading: Covered call example<\/h4>
Say you own 100 Apple shares, and the current market price is $150. Sell a call option for $2 per share with a strike price of $170 and an expiration date of 1 month later. You get $200 (100 shares X $2 per contract).<\/p>
3 possible outcomes:<\/p>
- Stock doesn\u2019t reach the strike price by the expiration date.<\/strong> The options expire worthless, and you keep the $200 contract fee and your 100 stocks.<\/li>
- Stock rises, but doesn\u2019t reach the strike price.<\/strong> You buy back the option for, say, $1 per stock ($100 total) and keep your stock. You profit $100 ($200 option contract fee, $100 paid to buy back the option) and can now sell another covered call and repeat the process.<\/li>
- Stock reaches the strike price.<\/strong> The buyer exercises the option to buy. You sell your 100 shares at $170 per share.<\/li><\/ol>
Covered call ETF<\/h4>
Looking to invest in a covered call ETF? Here are 6 funds you may want to consider:<\/p>
<\/p>
1. Covered call strategy<\/h3>
The covered call strategy involves selling call options on stock you own. If the stock doesn\u2019t reach the strike price, you profit from keeping the option contract fees. But you have to sell your stock if the strike price is reached and the buyer decides to buy.<\/p>
The covered call strategy is most successful when the stock price rises but doesn\u2019t reach the strike price, leaving you with fees for a contract the buyer cannot exercise and stock you can sell at a higher price.<\/p>
Use this strategy when you expect the stock price to stay flat or rise slightly.<\/p>
How to use the covered call strategy<\/h4>- Buy stock. <\/strong>Options contracts are typically bought in multiples of 100, so you don\u2019t have to buy if you already own 100+ stocks.<\/li>
- Sell call options.<\/strong> Selling a call option means you give a buyer the right to buy your stock at a specific strike price by a specific date (but the buyer may choose not to do so).<\/li>
- Collect the contract fee.<\/strong> Collect the option contract fee from the buyer. To increase your odds of keeping both the contract fees and your stock, choose a strike price above the current market price and a contract expiration date at least one month in the future.<\/li><\/ol>
Strategies for option trading: Covered call example<\/h4>
Say you own 100 Apple shares, and the current market price is $150. Sell a call option for $2 per share with a strike price of $170 and an expiration date of 1 month later. You get $200 (100 shares X $2 per contract).<\/p>
3 possible outcomes:<\/p>
- Stock doesn\u2019t reach the strike price by the expiration date.<\/strong> The options expire worthless, and you keep the $200 contract fee and your 100 stocks.<\/li>
- Stock rises, but doesn\u2019t reach the strike price.<\/strong> You buy back the option for, say, $1 per stock ($100 total) and keep your stock. You profit $100 ($200 option contract fee, $100 paid to buy back the option) and can now sell another covered call and repeat the process.<\/li>
- Stock reaches the strike price.<\/strong> The buyer exercises the option to buy. You sell your 100 shares at $170 per share.<\/li><\/ol>
Covered call ETF<\/h4>
Looking to invest in a covered call ETF? Here are 6 funds you may want to consider:<\/p>
Strategies for option trading: Covered call example<\/h4>
Say you own 100 Apple shares, and the current market price is $150. Sell a call option for $2 per share with a strike price of $170 and an expiration date of 1 month later. You get $200 (100 shares X $2 per contract).<\/p>
3 possible outcomes:<\/p>
- Stock doesn\u2019t reach the strike price by the expiration date.<\/strong> The options expire worthless, and you keep the $200 contract fee and your 100 stocks.<\/li>
- Stock rises, but doesn\u2019t reach the strike price.<\/strong> You buy back the option for, say, $1 per stock ($100 total) and keep your stock. You profit $100 ($200 option contract fee, $100 paid to buy back the option) and can now sell another covered call and repeat the process.<\/li>
- Stock reaches the strike price.<\/strong> The buyer exercises the option to buy. You sell your 100 shares at $170 per share.<\/li><\/ol>
Covered call ETF<\/h4>
Looking to invest in a covered call ETF? Here are 6 funds you may want to consider:<\/p>
- Stock rises, but doesn\u2019t reach the strike price.<\/strong> You buy back the option for, say, $1 per stock ($100 total) and keep your stock. You profit $100 ($200 option contract fee, $100 paid to buy back the option) and can now sell another covered call and repeat the process.<\/li>
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