I keep hearing about covered calls a lot but honestly have no clue what they are.
I looked online, but the explanations are too complicated for me. I need a simple breakdown.
Is this worth learning or should I focus on other strategies first?
Covered calls are a way to make some extra money from stocks you own. You have shares and sell the option for someone to buy them at a set price before a specific date.
You get paid right away for this. If the stock price stays below that set price, you keep your shares and the payment. If the stock goes above, you sell at the agreed price, but you still get to keep the initial payment.
It’s a great method for generating income from stocks you plan to hold long-term.
Own 100 shares. Sell a call option against them. Receive the premium immediately. Max profit equals premium plus strike price minus purchase price. Risk: stock price may exceed strike price, capping potential gains.
Covered calls are simple. You own 100 shares and sell the option for someone to buy them at a fixed price within a set time. You receive payment upfront. If the stock price is below your agreed price, you keep the premium and your shares. If it rises above that price, you sell the shares but keep the premium plus any gains until the agreed price. This method generates extra income from stocks you already hold.
Selling the option gives you cash now but limits your profit potential.
Covered calls are like renting out your car. You hold the shares and earn premium by giving someone an option to buy them.
Last year, I used this strategy with Apple shares. I made a decent premium over three months. The stock jumped, and I had to sell at my strike price.
I missed out on extra gains but still ended up ahead.