Covered Calls

Written by Joy MacKay
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Covered calls are another one of the more popular stock option strategies. But like the rest of them, you have to first understand them fully, to grasp how they can benefit investors in general. From there, you can decide the best way to implement these covered calls, to best benefit your portfolio.

The Mechanics of Covered Calls

The covered call strategy allows you to buy stock, the underlier, and sell call options simultaneously. These options are usually sold on an individual share basis. However, a new variation allows the underlying to be an entire portfolio, rather than a single stock.

Moreover, new covered calls allow for sold options to be index calls. This makes the underlying portfolio match performance of the underlying index. The index calls are then written against the portfolio in question.

So what's the advantage of covered calls? Your income pours in during a neutral or moderately bull-oriented market. You also receive limited protection for the stock portfolio. Covered call strategy, however, does only have limited profit potential, capped at the index level. Before dipping your toes into covered calls, you should familiarize yourself with contract specifics and cash-settled options. See how the market forecast works with these calls to maximize profitability. Finally, find a market expert to point you in the right direction, and to better assess the best way to use covered calls to your advantage.

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