A Beginner’s Ultimate Guide To Selling Covered Calls

Are you trying to get a foothold in the stock market? Knowing what to invest in or which strategies to follow can overwhelm new investors.

If you’re looking for a relatively low-risk strategy to get started, a covered call is a low-risk option that keeps your money safe.

In this beginner’s guide, we’ll break down the basics of covered calls, provide real-life examples, and explore the advantages and risks you can expect with using this popular strategy.

What Are Covered Calls?

Covered calls are a popular trading strategy to earn profits for every 100 shares you own of a particular stock.

When you decide to sell a covered call, you promise to do it when your shares hit a certain price within a specific time. In return, someone pays you a guaranteed premium once you sell, with no strings attached.

Many low-risk investors see covered calls as the perfect opportunity to profit without selling their stocks completely. Even if they had to, they could keep their premiums without penalties.

An Example Of A Covered Call In Real Life

Say you have 100 shares of your favorite company’s stock worth $97 per share. This company is considered a blue chip stock, so you don’t expect it to grow dramatically soon.

To earn money on your stock, you sell a call option with a strike price of $100 by October 10th. As a reward for selling this option, you get a premium of $0.65 a share or $65. If your stock stays below $100 by expiration, you’ll pocket the $65 and keep your shares.

In this case, the company’s pretty stable, making it a low-hanging fruit for earning some quick cash to reinvest in other stocks or add to your savings.

But what happens if you wake up and see it surge to $110 overnight?

In that case, you’ll have to sell your shares at the strike price and potentially miss out on bigger returns.

Benefits Of Covered Calls

So, is a covered call the right move for beginner investors? Here are a few key reasons why this strategy should be a part of your larger strategy:

More Flexibility: You’ll have the chance to make money in virtually any market condition. Whether the stock price rises, stays flat, or drops, it’s a win-win situation.
You’ll Earn More Income: The best part about covered calls is the income boost you receive from selling. The premium you collect helps you maximize your overall ROI.
There’s Less Risk Involved: Covered calls are less risky than other strategies. Even in the worst-case scenario of selling your stock, you can still profit and get your premium.

Disadvantages Of Covered Calls

Covered calls are low-risk moves that can reliably make you money. But like any strategy, it has its downsides:

Limited Profit: Besides selling your shares for slightly more (if they’re above the strike price) and cashing in your premium, the income potential is relatively limited.
Potential To Miss Out: Even if your chance of stock hitting an all-time high is high, you won’t have the chance to sell it at that amount if it exceeds the strike price. This move could force you to leave thousands you could’ve earned under normal circumstances.
Unprotected Against Declines: While the premium could buffer against a stock price decline, you may still lose money if it falls too low.

Best Tips To Improve Covered Call Strategy

Want to know when to pursue a covered call strategy? Here are some common tips experts recommend when starting:

Choose The Right Stock: Consider blue chip stocks for covered calls, as they’re stable and less likely to experience a massive price difference.
Be Realistic: Select strike prices that match your income goals and motivate you to sell your stock.
Time Your Sales: Time sales when volatility is high, as premiums will likely be larger and help boost your final profit.

The Bottom Line

If you’re new to trading, covered calls are a low-risk way to maximize your profit on stocks you already have.

While you might make less than other strategies, it can be a safe way to make consistent income, minimize risk, and create a well-rounded portfolio.