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For those who want to sell covered calls, you need to make sure you have a solid strategy to profit from. Even when you have a strategy set up for covered calls you still have to decide on a strike price and whether you will want to sell a covered call in or out of the money.
Why would anyone want to sell a covered call in the money?
Typically the reason for selling a covered call in the money is to get a higher premium. An investor might want to do this to protect some profit if they believe the stock will drop in price but they don’t want to sell the stock for whatever reason.
Selling a call that is in the money will generate a substantial premium while allowing the investor to hold the stock for dividends or for whatever other reason they choose.
Some people have substantial gains in a stock and don’t want to sell it as they will be taxed on it but want to protect that gain as well. So selling an in the money covered call will allow them to do that.
You’ll want to make sure you’re informed before you attempt to buy or sell options. Selling a covered call offers you two significant benefits: downside protection and higher potential profits.
If you want to learn more, all the essential information is in the article below! You can also find some popular books about covered call investing by clicking here.
What It Means To Sell A Call “In the Money”
When someone sells a call in the money, the stock price is higher than the strike price that they are selling the call at.
So for example let’s say you own ABC stock that is currently trading at $30. If you sell the $25 strike price call option that call is considered to be in the money by $5 and will typically be worth $5+ depending on how much time is left until expiry.
Being that you can get the in the money amount plus an additional time premium selling an in the money call is an excellent way to protect your profits or your stock from downside movement.
Watch this informative YouTube video that covers how to trade when your covered call is in the money to learn more.
Selling Covered Calls In the Money
When it comes to call options, you want to sell when the stock price is at or in the money to get the most possible premium.
The deeper in the money that the call option is, the smaller the time premium that you will receive is.
So say for example ABC stock is at $30 and you sell a $25 call. You might get $5.50 for that call if it is a month out from expiry. However if you sell a $20 call you might only get $10.25 or even $10.10.
As a call gets deeper in the money and the price of it gets closer to the price of the actual stock, traders are willing to pay less of a premium for the time so that value might even go down to nothing.
As the call owner, you profit when the premium you paid is less than the difference between the stock price and the strike price. As an example, you bought a call for $0.25 with a strike price of $20. The stock has a value of $25 now- this makes the option worth $5, so you make a profit of $4.75 when you sell it.
Of course, you might work with higher or lower values in real-life situations.
Overall, selling your covered calls in the money comes with benefits. You can receive a premium, which also helps increase the profit or protect the profit that you have on a stock already.
Benefits Of Selling In The Money Covered Calls
When you sell your covered calls in the money, you gain one significant advantage that works for you. That main advantage is protection from a downturn in the market. If your ABC stock drops from $30 all the way down to $20 and you sold a $20 call for $10 you didn’t lose a dime!
Since the premium you collected is yours no matter what the stock price does after you sell it you have that $10 in downside protection. You can then buy back the call for very cheap or wait until it expires (assuming it stays below the $20 strike).
This factor makes the strategy work very well for those worried about potential downsides. When you learn to use these aspects of covered calls, you can feel much more comfortable pursuing in the money call sales.
I recommend you read the Freeman Publications Covered Calls for Beginners (available on Amazon.com) if you’re new to working with covered calls. The book teaches you how to make safer trades, double your cash flow, and earn more dividends.
It contains a lot of essential information on using covered calls.
You Get Downside Protection
When you sell a covered call, you get great downside protection. According to Investopedia, downside protection is when techniques mitigate or prevent the value of the investment from decreasing.
How does this factor into covered calls?
When you sell any call option, you are trying to get the premium. Even if the stock decreases in value, you can always keep the premium- which adds protection from loss.
Many investors use this downside protection in their covered call strategies.
You Can Earn Higher Profits
Since your downside is better protected you can earn much higher profits even if the stock price drops. Once the stock price drops near or below the strike you can buy back the call that you sold at a substantial discount when compared to what you sold it at.
Buying the call back when you think the stock price will head higher again allows you to capture additional profits that you wouldn’t have if you simply would have help the stock like normal through the ups and downs. F but
Risk to Selling Covered Calls
While selling a call is mostly a low risk, you can still experience losses. These losses occur when the options underlying stock drastically increase in price (although it isn’t a traditional loss it is lost profits). It also doesn’t protect you against severe drops in the market.
The option sellers take on more risk than the buyer. Buyers only have a risk up to the premium they paid for the call option. However, sellers then take on much more of the risk. By owning the underlying stock in a covered call, you can mitigate a bit of that risk.
You always get to keep the premium when you sell the call, but if the stock value rises above the strike price; you can’t make more than that cap. Because of this, some people feel that working with covered calls is much more challenging.
However, once you understand these options more, you can mitigate more of the risk in selling them. Selling in the money is usually a decent option for many investors who want to keep the premium and pocket a nice profit in one go.
In short, you receive some benefits when selling a covered call in the money. I recommend that you should always take the time to consider everything before making any trades. That way, you can do so with confidence.
Covered calls are another way to earn some income on the stock you already have in your portfolio. If you want to make the most of what you already have, it’s a good idea to learn how to work with these options.