Covered Call Options: A Beginner's Guide to Boosting Portfolio Income
Are you looking for ways to generate extra income from your stock portfolio? Covered call option selling might be a strategy worth considering. This beginner-friendly approach can help you earn additional cash from stocks you already own. Let's break it down:
What is a covered call?
A covered call is an options strategy where you sell (or "write") call options on stocks you already own. By doing this, you're giving someone else the right to buy your shares at a specific price (the "strike price") within a set time frame.
How it works:
- You own 100 shares of Stock XYZ, currently trading at $50 per share.
- You sell a call option with a strike price of $55, expiring in one month.
- You receive a premium (let's say $1 per share) for selling this option.
Possible outcomes:
A. If the stock price stays below $55:
- The option expires worthless
- You keep the premium ($100) and your shares
B. If the stock price rises above $55:
- The option may be exercised
- You sell your shares at $55 each
- You still keep the premium
Benefits:
- Extra income: You earn premiums, boosting your overall returns.
- Downside protection: The premium provides a small buffer against price drops.
Risks:
- Limited upside: Your potential gains are capped if the stock price soars.
- You may have to sell your shares if the option is exercised.
Covered calls can be an excellent way for beginners to dip their toes into options trading while potentially enhancing their portfolio's income. However, it's crucial to understand the strategy fully and consider your investment goals before implementing it.
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