To The Moon

Hey everyone, let's talk about a classic options strategy often called "buy-write" or simply selling Covered Calls. If you've ever felt like your stocks are just sitting in your portfolio, this strategy can be a way to put them to work and generate income. It's one of the most reliable and beginner-friendly ways to dip your toes into the world of options. To help you master such strategies, Tiger Brokers offers the "OPTIONS HANDBOOK-From Beginner to Pro" – your ultimate guide to navigating options with confidence.

At its heart, think of a Covered Call like collecting rent on a house you own.

You believe in your property's long-term value, but you don't expect its price to double next month. So, you rent it out, collecting monthly checks for as long as you own it. A Covered Call does the same thing with stocks you already hold. Your shares are the "house," and selling the call option is like signing a rental agreement where you collect immediate "rent" (the premium).

WHAT Is a Covered Call?

A Covered Call involves two simultaneous actions:

1. Owning Shares: You hold a long position in a stock.

2. Selling a Call Option: You sell (or "write") a call option contract against that same stock.

The term "covered" is crucial. It means you already own the underlying shares, which act as collateral. This distinguishes it from a "Naked Call," where the seller does not own the shares, exposing them to theoretically unlimited risk.

WHY Use This Strategy?

1. Generate Income: Create a steady stream of cash flow from stocks you plan to keep.

2. Lower Your Cost Basis: The premium you receive directly reduces your average purchase price for the stock.

3. Ideal Mindset: You are neutral or moderately bullish on the stock in the short term and are willing to cap your upside potential for immediate income.

WHO Is This Strategy For?

The Covered Call strategy is ideal for investors who:

• Already hold a long-term stock portfolio.

• Have a neutral or slightly bullish short-term view on their stocks.

• Seek to generate additional income from their existing assets.

• Are willing to potentially sell their shares at a predetermined price.

WHEN Is a Good Time to Sell a Covered Call?

1. Market Outlook: When you're neutral or cautiously optimistic about the stock's near-term prospects.

2. Technical Levels: After a stock has had a run-up and is approaching a technical resistance level where you think it might stall.

3. High Implied Volatility (IV): When IV is high, option premiums are more expensive, meaning you can collect more "rent" for the same strike price.

HOW It Works: A Step-by-Step Example with

Let's see how this works with a company called Pear Inc.

The Situation:

You own 100 shares of Pear Inc.

The stock is currently trading at $95 per share.

You're unsure if the price will rise significantly soon but don't want to just wait passively.

Your Action: The Covered Call Trade

You decide to sell one Pear Inc. $100 strike call option expiring in one month. For this contract, you receive a premium of $5.00 per share.

Your total immediate income: $5.00 x 100 shares = $500.

Three Possible Outcomes at Expiration:

1. Pear Inc. Stock is at or Below $100

   • The option expires worthless.

   • Your result: You keep the $500 premium. You still own your 100 shares. Your effective cost basis is now reduced, making it easier to profit in the future.

2. Pear Inc. Stock Rises Above $100 (e.g., to $110)

   • The option is exercised. Your 100 shares are "called away" and sold at the $100 strike price.

   • Your result: You profit from the stock's rise from your original purchase price to $100, plus you keep the $500 premium. Your upside is capped at the $100 strike price.

3. Pear Inc. Stock Price Falls

   • The option expires worthless, and you keep the $500 premium.

   • Your result: The $500 premium provides a cushion against your unrealized loss from the stock's decline.

Key Takeaways

• Maximum Profit is Capped: It is limited to [(Strike Price - Your Stock Cost) + Premium Received].

• You Keep the Premium No Matter What: The income is guaranteed once the trade is placed.

• Downside Protection is Partial: The premium only cushions a loss; you are still exposed if the stock falls significantly.

Conclusion

The Covered Call is a powerful, conservative strategy for turning your stock portfolio into an income-generating asset. By collecting "rent" on your shares, you can lower your cost basis and enhance returns, especially in markets that are not rapidly rising.However, it's important to note that this strategy isn't suitable for all market conditions - particularly during strong bullish rallies, it may cause you to miss out on greater potential gains.

Interactive Q&A Session: Test Your Covered Call Knowledge!

Ready to apply what you've learned? Answer these 5 quick questions about Covered Calls! Join the quiz below to solidify your options knowledge and stand a chance to win Options Handbooks and USD 5 options vouchers.

Click to view more: https://www.itiger.com/sg/marketing/tigeroptionsdatainsightssg

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