Covered Call Writing, I don’t Sell Naked!

Covered call writing gives you all of the advantages that come with selling calls without the problems you get when you sell naked options.

When you sell a call you get paid to carry the obligation of selling a stock at a certain strike price on or before a given date.

Making money up front is the benefit of this strategy, but if you just leave it there you would be risking an infinite loss. There is no limit to how far up the stock can go, so there is no limit to how much you could possibly lose on a trade like this.

This is why whenever I sell a call I like to also buy the stock. If I buy the stock at $29.2 and sell the call at $1.30 I will receive money up front, but if I do get called out I can simply sell the stock I already own instead of having to go buy it at whatever price it may have gotten too.

This strategy of buying the stock before selling calls is called covered call writing because the calls you sold are covered by the stock you own.

There is one way I can lose money through this strategy, and that is if the stock goes down at a fast rate. And there are only two things we can do about that.

1. Check the Fundamentals and technicals of the stock.

If it is a strong stock then the odds of it taking such a large loss over a short time frame are lessened.

2. Place a stop Order

I can always place a stop order that will sell my stock and buy back my call option if the stock starts to lose money. In most cases the amount I would lose on the stock will be offset somewhat by the amount I gain on the option.

Return From Covered Call Writing to Option Spreads