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Take a look at the covered call risk profile in figure 1. If you sell the call, you’ll receive cash (premium), which is immediately deposited into your account (less any transaction costs). The cash is yours to keep no matter what happens to the underlying shares.
What to do after selling a covered call?
Assignment: Do nothing and let your stock be called away at or before expiration. Close-out: Buy back the covered calls (at a gain or loss) and retain your stock. Unwind: Buy back the covered calls (at a gain or loss) and simultaneously sell your stock.
Can you sell a call option immediately?
Call options are “in the money” when the stock price is above the strike price at expiration. The call owner can exercise the option, putting up cash to buy the stock at the strike price. Or the owner can simply sell the option at its fair market value to another buyer before it expires.
What happens when you sell a covered put?
By selling a cash-covered put, you can collect money (the premium) from the option buyer. The buyer pays this premium for the right to sell you shares of stock, any time before expiration, at the strike price. The premium you receive allows you to lower your overall purchase price if you get assigned the shares.
How soon can you sell a call option before it expires?
The buyer can also sell the options contract to another option buyer at any time before the expiration date, at the prevailing market price of the contract. If the price of the underlying security remains relatively unchanged or declines, then the value of the option will decline as it nears its expiration date.
Is it better to sell covered calls or covered puts?
Even though a covered call and a short put have the same risk, the ability to manage this risk is much better in a covered call than a short put. For investors looking to repair their losing strategies rather than just take a loss at the first sign of trouble, the covered call is the better strategy.
Can you lose money selling covered puts?
Losses. Losses are reduced only by the amount of premium you received on the initial sale of the option. In addition, it’s rarely a good idea to sell a covered option if your stock position has already moved significantly against you. Doing so could cause you to establish a closing price that ensures a loss.
Should you sell in the money covered calls?
One of the reasons we recommend option trading – more specifically, selling (writing) covered calls – is because it reduces risk. It’s possible to profit whether stocks are going up, down or sideways, and you have the flexibility to cut losses, protect your capital and control your stock without a huge cash investment.