Individual investors need to take a serious look at covered calls. This is especially true for investors who feel options are a highly risky trading vehicle.
So, what is a covered call?
By definition…a covered call is a conservative options strategy whereby an investor holds a stock or ETF in an asset and sells call options on that same asset to generate increased income. Unlike buying options outright, covered calls are a conservative strategy. In fact, covered calls are the only options strategy that is allowed in retirement accounts.
All you need to initiate the strategy is 100 shares of stock and a liquid options market. By liquid, I mean options with significant volume . If you own at least 100 shares of stock, then you have the ability to “sell a call” against your stock (assuming it has options, which most do). Remember, 100 shares of stock equals one option contract.
So why sell covered calls?
If you wish to bring in residual income on a consistent basis or if your market forecast is neutral to moderately bullish selling covered calls is the appropriate options strategy.
A covered strangle is a neutral strategy that’s traded when little volatility is expected before options expiry.
By trading SPY options, I’m not exposed to volatility caused by unforeseen news events that can be detrimental to an individual stock's price
The short calendar strangle strategy is a bet on volatility that relies heavily on an initial net credit to produce a profit.
The calendar strangle is a sophisticated strategy that aims to capitalize on a near-term lack of volatility followed by an explosive move in the underlying.
The bear strangle is a non-directional trade that profits when the underlying trends strongly in either direction, but a greater haul if the move is lower.