How to Sell Covered Calls - Options Trading Explained

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★ Selling Covered Call Option Example on Charles Schwab
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What Is a Covered Call?
A covered call refers to a financial transaction in which the investor selling call options owns an equivalent amount of the underlying security. To execute this an investor holding a long position in an asset then writes (sells) call options on that same asset to generate an income stream. The investor's long position in the asset is the "cover" because it means the seller can deliver the shares if the buyer of the call option chooses to exercise. If the investor simultaneously buys stock and writes call options against that stock position, it is known as a "buy-write" transaction.

Understanding Covered Calls
Covered calls are a neutral strategy, meaning the investor only expects a minor increase or decrease in the underlying stock price for the life of the written call option. This strategy is often employed when an investor has a short-term neutral view on the asset and for this reason holds the asset long and simultaneously has a short position via the option to generate income from the option premium.

Simply put, if an investor intends to hold the underlying stock for a long time but does not expect an appreciable price increase in the near term then they can generate income (premiums) for their account while they wait out the lull.

A covered call serves as a short-term hedge on a long stock position and allows investors to earn income via the premium received for writing the option. However, the investor forfeits stock gains if the price moves above the option's strike price. They are also obligated to provide 100 shares at the strike price (for each contract written) if the buyer chooses to exercise the option.

A covered call strategy is not useful for a very bullish nor a very bearish investor. If an investor is very bullish, they are typically better off not writing the option and just holding the stock. The option caps the profit on the stock, which could reduce the overall profit of the trade if the stock price spikes. Similarly, if an investor is very bearish, they may be better off simply selling the stock, since the premium received for writing a call option will do little to offset the loss on the stock if the stock plummets.

Maximum Profit and Loss
The maximum profit of a covered call is equivalent to the strike price of the short call option, less the purchase price of the underlying stock, plus the premium received.

The maximum loss is equivalent to the purchase price of the underlying stock less the premium received.

Can I use covered calls in my IRA?
Depending on the custodian of your IRA and your eligibility to trade options with them, yes. There are also certain advantages to using covered calls in an IRA. The possibility of triggering a reportable capital gain makes covered call writing an good strategy for either a traditional or Roth IRA. Investors can buy back the stock at an appropriate price without having to worry about tax consequences, as well as generate additional income that can either be taken as distributions or reinvested.

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#OptionsTrading #CoveredCalls #SellingCallOptions
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DISCLAIMER:
This video is for entertainment purposes only. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.

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[JakeBroe]

Give this video a LIKE to support my channel! Also check out my entire playlist on Trading Options here!

[BenjiScrilla]

Jake, funnily enough I still send this video to people probably once a week, it is hands down the explanation for covered calls on youtube.

[jeffconner]

from the video @16:20 - Covered Call Tips
1) Sell mostly 1-2 month contracts
2) Sell covered calls when IV is high
3) Sell Calls with a Delta ~0.30
4) Watch out for ex-dividend dates
5) If you capture 80%+ value, then “buy to close” to lock in profit

i found this slide really useful, and the explanations to go along with it were great too.

[ladyeater]

Dear Jake the Trade If anyone ask your my Cousin. Keyon Sowell . I was looking for some one to hold my hands so I can start trading options. All that good game you give on channel example on the screen step by step information. I have learned a lot . By the time I go through your videos I will have wingz 🎉thank you

[adilski]

You sir excelled at what many YouTubers have failed at — explaining this concept beautifully!
Thank you

[austindrury]

Great video Jake! I recently started selling covered calls and have two more technical tips in case anyone else wants to try this out!
1. If you transfer funds to your brokerage or sell a position for funds, then buy 100 shares of something for the purpose of selling a covered call and sell the covered call the same day, be cautious. If the buyer does, for whatever reason, exercise the contract within the time it takes your funds to settle, this will invoke a Good Faith Violation (at least for Fidelity and Charles Schwab) .
2. Low premium calls that are very short may not be ideal, as there is a $0.65 fee (per contract not share). If you sell a contract that's just 1 week and it only has a premium of, say, 0.02, this is $2, but 0.65 (or 33%) of your premium ends up going toward this fee.

[nyhustler]

You explained covered calls better than anyone who has tried to explain it to me. All everyone tells me is to trust them, and there's almost no way to lose money. Im just not that kind of person to believe that's the case without understanding the why or how

[MrNetsecure]

This is the best course on option trading out on the internet. Period!!! Thank you so much for creating this amazing content. These videos taught me option trading a few years ago and i still watch them time to time to revise my knowledge. Thank you Jake! Im a seasoned trader now just because of you!

[Tafuny]

Jake, this is one of the best videos I've come across breaking down covered calls. I've read up on it and often times I'm confused. Thank you so much!

[galleysarai]

I love the fact that you show examples on how to trade on specific brokerages like Fidelity in your other videos. I love it. THANK YOU Jake.

[victormtz]

Let’s see if I learned. I have 260 shares of GSAH. I am comfortable selling at 12.50 in the 12 days expiration delta of 0.03. Easy 20 dollars for two contracts (my trade idea of low risk for practice round)

So I applied to Charles Schwab level 2 options and got accepted. Come Tuesday I can put in an order:

Action STO (sell to open)

As a means to practice at my own risk, practicing what you educated

Sorry for long read. Appreciate every video. Grats on doubling account sooner than expected!

[VerseKiller]

This was the first vedeo that I actually learned how to apply, using the real buying options, great JOB!!

[Walt]

By far the clearest and simplest explanation I have found. Thanks.

[nathana]

Been going through finance and investment channels this year and just came across yours. You give very lucid and helpful explanations. Thank you for the uploads and please keep them coming! 👍🏻

[kendowarrior]

I'm bullish on GE so I took advantage of the dip today to get my small account up to 100 shares with the intent of selling covered calls on positive news for them.

[raymondsimmons]

Great video. Thank you Jake. The downside to covered calls are (1)losing potential upside during the contract and (2) price of stock plummets, making premium insignificant. There are more positives than negatives. Of all the positives, I like, in particular, how the premium gives me more flexibility. I have downside protection and can still make a quality return on the position.

[garthmccarthy]

So brilliant Jake - all the way to the end especially capturing the 80% buy to close

[craigchambers]

I'm going to check this out. Won't waste time talking about my devastating loss via options through a company some years back thinking those fellows know what they are doing and I don't so here is a chunk of my savings... anyway, this explanation was very VERY helpful. Sound like something I can do. Appreciate you labor, new friend Jake.

[VerseKiller]

I loved the way he explained how to apply the lessons in real way!!

[whitefox]

Thanks Jake! This is one of the best options video ive I've watched, very helpful