Covered call option writing analysis

It is whether to sell it or hold on.

The Basics of Covered Calls

An area of resistance or resistance level indicates that the stock or index is finding it difficult to break through it, and may head lower in the near term. However, to comprehend the underlying logic, we must first understand the concept of In-the-Money covered calls.

Covered calls also reduce the risk of default of security transfer by the option writer and act as a guarantee for the option buyer. The buyer pays this to the seller writer of the option.

If the stock price shoots up the strike price, the buyer exercises the option and makes a profit.

Covered Call

The option writers stand to gain by the news of due earnings on the underlying securities in terms of better strike prices and favorable maturity periods. Moreover, the option buyers are also willing to pay higher premiums when they become familiar with the news of due earnings on the underlying security in an option contract.


The knowledge of the due earnings of an underlying security pushes the option premiums up to a certain level that is consistent with the option returns by taking the security earnings into consideration. Traders who trade large number of contracts in each trade should check out OptionsHouse.

The time value decay of the option contract accelerates as the expiry date approaches provided that the option is trading below the exercise price.

When the news of earnings reaches the public domain, the market price of the security also aligns itself to reflect the news. To be sure, numerous "experts" have been calling the end of the ongoing 8-year bull market since its very beginning.

However, this risk is no different from that which the typical stockowner is exposed covered call option writing analysis. In order to be able to correctly predict the covered call writing returns, one need to be able to correctly predict the overall market returns.

On the other hand, by writing covered calls, a trader stands to earn by way of premium even when the markets are trading low. To flip the position, the option writer has to buy another option on the same stock and with the same maturity period.

This is also the reason why the price of an option contract falls sharply as the expiry date nears. Follow Aristofanis Papadatos and get email alerts Your feedback matters to us!

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. Even for stocks that are In-the-Money, the higher the intrinsic value, the higher is the premium paid to the option writer. Now that we have understood that options are valued based on their premium, let us analyze the factors that determine the premium of an option contract.

The news of the security earnings provides a kind of leverage to the option writers. On careful analysis, it is observed that the intrinsic value of an option has a linear relationship with the premium commanded by the option contract.

There are two parties to a covered call option contract, the seller of the option, who is also called the writer, and the buyer of the option who gets the right to exercise the option in lieu of a payment of premium to the writer.

They achieve a capital gain, their short call expires worthless and they get to hold on to the stock in order to sell another lot of calls. A call option can be sold even if the option writer "A" does not initially own the underlying stock, but is buying the stock at the same time.

The time value of an option reduces to zero on the expiration date.Covered Call Writing Calculator Calculate the rate of return in your cash or margin buy write positions This calculator will automatically calculate the date of expiration, assuming the expiration date is on the third Friday of the month.

By comparison, the covered call writer who is glad to liquidate the stock at the strike price does best if the call is assigned -- the earlier, the better. Unfortunately, in general it is not optimal to exercise a call option until the last day before expiration. Covered calls are an options strategy where an investor holds a long position in an asset and writes (sells) call options on that same asset to generate an income stream.

When it comes to covered call trading, technical analysis can be a key factor. The primary risk with covered calls is that your stock will have a sharp move lower, so sticking to stocks in well defined uptrends can help minimize (but not eliminate) that risk.

A covered call is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities.

If a trader buys the underlying instrument at the same time the trader sells the call, the strategy is often called a " buy-write " strategy. Covered Call Writing. Definitions. A call option may be defined as a contract that gives its holder a right, but not an obligation, to buy an underlying stock at a pre-determined price called the strike price.

Covered call option writing analysis
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