Wealthy Living

Covered Calls Primer Money For Nothing: The Guide to Finding The Best Stocks

Writing covered calls is not quite “Money for nothing”, but it is as close to free money as I’ve been able to find.

I spend roughly an hour every other week looking for possible covered call opportunities, reviewing my existing covered call positions, and/or rolling those positions at risk of getting exercised.

This article explains what covered calls are, how you find good covered call opportunities, and how to actually write (sell) covered calls.

Covered Calls

A covered call option is a financial transaction in which the writer (seller) of the call option receives a premium (cost of the option) in return for granting the call option buyer the right to buy the specified number of shares from the investor at the agreed upon strike price for a period of time determined by the option expiration date.

The buyer of the covered call has the right (not obligation) to purchase the underlying shares from the investor at the option strike price anytime up through the option expiration date.

The investor’s long position in the asset is the “cover” because it ensures the call writer (seller) can deliver the shares if the buyer of the call option chooses to exercise the option.

Selecting A Call Option To Write (Sell)

When searching for covered call candidates, I typically try to find options that will provide a 10% or greater annualized return based on the option price (premium) versus the current price of the underlying stock.

Risks Inherent in Writing Covered Calls

The short answer is that there really is no risk.

If you write your call options at a strike price above the current stock price and the call gets exercised (because the stock price rose above the strike price), the worst that can happen is your shares get called away at that strike price and you keep as compensation the covered call premium.

Swipe up now to read the full post!