Powerful Hidden Techniques Mystery Formula - The Covered Call Option Trading Buy-Write Strategy

For better or worse, most option trading investors purchase pillory with the purpose of holding their shares for an drawn-out clip period of time.

We make this mainly because the mass media and industry people have got drilled into our heads, twelvemonth after year, clip after time, that it’s best to purchase and hold. The recent bull market phenomenon also fueled this mentality because the bargain and throw strategy worked extremely well - for a while.

Whether or the not the bargain and throw strategy is still the most efficient manner of option trading and investment stays a subject for discussion. However, it is still the strategy that most option trading investors are comfy with and be given to follow.

The first strategy we will discourse is a loanblend of the bargain and throw strategy, one that supplies for better and more than consistent tax returns a large bulk of the clip when compared to bare stock ownership alone.

When we purchase a stock, there are three possible outcomes. As we discussed previously, two of these scenarios are generally negative and only one result is generally positive. If the stock travels up, that is good. If the stock travels down, that is bad. And if the stock remains still, that is also a bad outcome.

To briefly recap, not only make you have got got a loss in chance cost (the money invested in your dead stock could be making you money if somewhere else) but also, you have incurred committee costs on both the manner in and manner out. So, in this case, only one of the three scenarios supplies a positive return.

For the interest of description, we will place the three potentiality scenarios as the up scenario, the down scenario and the dead scenario. By employing the covered phone phone phone phone call or buy-write strategy, you can change the consequence of the scenario profile so you have got got two positive potentiality consequences instead of lone one.

Employing the covered call or buy-write, we still have the up scenario as a positive result, but now the dead scenario will also bring forth a positive consequence since we accumulate a insurance premium and the 3rd scenario, the down scenario will not be as negative.

Thanks to the covered call strategy, now two of three scenarios end in a positive consequence and the 3rd have a consequence that is less negative.

Let’s take a near expression at the covered call strategy and its construction. There are two constituents of the covered phone call strategy, the stock constituent and the option component.

The stock constituent dwells of a long stock place (you have stock). The option constituent dwells of merchandising 1 phone call per every one-hundred shares of stock owned.

Remember, 1 option contract is deserving one hundred shares of stock. So for example, 1000 shares of stock bes 10 phone phone phone call contracts or 200 shares bes 2 call contracts.

The chart below shows more illustrations of the proper building of buy-writes.

Please take particular short letter that the ratio of stock to phone calls must be exactly 100 shares to 1 option contract.

Number of Call Contracts
Shares to
Owned Sell

100 1
300 3
1700 17
9200 92
14500 145
267000 2670

The doctrine behind the covered call strategy is not complicated. It implies using a long stock place along with a short phone call option to make a positive watercourse of further income, much in the same manner a individual would purchase a house and then rent it out to accumulate rent in order to pay for the mortgage.

Another analogy is that of the insurance company. An insurance company have insurance premiums calendar calendar month in and month out. Over a clip period of time, this changeless watercourse of income easily constructs to a point where it outweighs any wage out the insurance company may face, even for ruinous events.

The changeless and reoccurring aggregation of option insurance premiums works better if done over longer clip periods of time (for example, one year.) That clip framework allows the likelihood to play into your favor.

Now let’s talking about the odds. There have got been respective surveys done on the subject of insurance insurance premium purchasing versus premium selling. The end of the surveys was to determine whether it is better to purchase options or sell options.

Recent surveys have got establish that merchandising the insurance premium was the right trade 78% to 83% of the time. That is a very high percentage and is deserving pickings advantage of when a good chance shows itself.

The covered phone call strategy takes advantage of the fact that an option trading is a depreciative plus because its extrinsic value travels to zero at expiration. The procedure by which an option’s extrinsic value dissipates is called clip decay.