How to Sell Covered Calls on Robinhood - Trading Options for Beginners

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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.

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#Robinhood #CoveredCalls #TradingOptions
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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!

[blackice]

For newer traders it is important to note; While you can't lose money on the contract you sold in this example. You CAN lose money on the 100 shares you are holding as collateral. In example if BAC goes down to $38 a share, Jake will lose roughly $200 on the underlying, while still collecting the $70 on the cover call contract for a net loss of -$130.

[hikesteepfishhigh]

I've been watching videos for a week and while I understand what a covered call is, I was not exactly sure how to do it.
this video showed me exactly what I was looking for.

[claytonwright]

The only person that explained selling them and how they can be excercised. Instead of only how they can be bought. U are the man my brother. I’m gona subscribe. To bad other ppl don’t take after u bro

[TerranceBledsoe-hpec]

I have watched dozens of videos, over 100 hours and I had it all figured out except they left out an important thing and that was the rate of decay such as the Greeks. Thank you so much for explaining that in this video. I'll be checking out more videos from here on out.

[Bbloke]

I watched about 6 different videos trying to understand this. You explained it so plain and simple. Thank you!

[Danielprokopij]

The only thing I like about Robinhood vs fidelity is that in options the strike prices go in opposite directions. It just makes sense in my head a little more 😅

[jeffconner]

i requested an example and jake provided! thanks for listening to your viewers! @8:32 you mention net losing value, but I thought you mentioned previously you won't lose money if covered and choosing a strike price that when sold would net gain (for a capital gain). the start-to-finish overall strategies are still fuzzy to me. the example REALLY helps though.

[josezerpa]

Thank you! Very simple, and to the point. Well explained

[newcomerviolinist]

I'm giving this video a thumbs up just because I haven't heard Black-Scholes since my 3rd actuarial exam about 4 or 5 years ago. Thank you for helping me get a quick run-down of the delta value!

[zk]

The monthly option for October is 15th, not 22nd. I mention this because monthly options have the most liquidity and narrower bid ask spread

[JusdoinstuF]

great explanation, im new to options, why do you like to do 30+ days out for selling calls?

[MyNguyen-qpzd]

Hi Jake, could you share some common mistakes selling covered calls?

[khan_irshad]

Thank you, Jake. I do follow your options and try to implement :). Hope to see more trade options in Robinhood

[WeAllWeGot]

Your a genius you just explain covered call ETFs

[salcastanon]

I’m new to the stock trading stuff on Robin Hood. Your information helped me out. Thanks again 🙏🏽

[PicafloresOficial]

Thank you. Been looking for this video

[jutnguj]

Hi Jake, Love your videos. I learned a lot from them. Thank you very much. I have an option basic question. If I bought a call option, if the stock price higher than the strike price at expiry date, what should I do? Do I need to receive the stock? Do I need to notify the brokerage (fidelity) to sell it? I have sell call or sell put, but never wait to expire for buy call or buy put. Thank you!

[dariusbradley]

I wish I would have found your page 2 years ago 😂but I’m here now. Thanks Jake!

[Nice-Y]

10/22/21 is a weekly. 10/15/21 is the monthly options.