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: With the markets seeing a downward trend, a strategy with which you can make money even if the market doesn't rise is covered call (CC). CC provides some protection against falling stock prices, though generally not enough to offset a steep plunge. Experts believe that it's “safer than holding the stock outright.”
CC works in this fashion: Holding a long position in an asset and selling call options on that same asset. This strategy is best suited for shares that move up slowly or are stagnant. It is observed that government-owned companies usually form part of any investor's portfolio. Stocks that give good dividend and are fundamentally sound, form good choices for CC.
How it works
Covered call strategy is two-fold. First, you already own the stock. You will then sell, or write, one call option for each multiple of 100 shares you have (i.e. 100 shares = 1 call, 200 shares = 2 calls, 276 shares = 2 calls).
When using the covered call strategy, you have slightly different risk considerations, than you do if you own the stock outright. You do get to keep the premium you receive when you sell the option, but if the stock goes above the strike price, you have capped the amount you can make. If the stock goes lower, you are not able to simply sell the stock; you will need to buy back the option as well.
There are a number of reasons traders employ covered calls. The most obvious is to produce income on stock that is already in your portfolio. Others like the idea of profiting from option premium time decay. A good use of this strategy is for a stock that you might be holding and that you want to keep as a long-term hold, possibly for tax or dividend purposes. You feel that in the current market environment, the stock value is not likely to appreciate, or it might drop some. As a result, you may decide to write covered calls against your existing position. Alternatively, many traders look for opportunities on options they feel are overvalued and will offer a good return. To enter a covered call position on a stock you do not own, you should buy a call option and simultaneously sell the call. Remember, when doing this that the stock may go down in value. In order to exit the position entirely, you would need to...
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