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.
Why would you ever buy a stock based on an analyst’s price target that has a chance of success of only 35%, 5% or even 1%? It’s pure insanity.
The synthetic short stock with split strikes strategy is a means of muting both the risk and reward of a straight short sale.
A synthetic short stock trade is formed by selling a call and buying a put with the same strike price and expiration date.
The synthetic short call strategy involves shorting 100 shares of the underlying stock and selling an at-the-money put against it.
Weekly options are not even a decade old. And like most new financial products, it took "weeklys" a while to grow in popularity.