Selling a call means that you have an obligation to sell shares on the expiry date of the contract, at a certain price defined by the strike, and in return you receive a payment (the premium).
What is selling a covered call?
Those who use this strategy usually benefit, if things go as expected, from the premium received by selling the call contract and the possibility that there is a difference between the current price and the strike price.
You can sell a call, if you believe that the shares of a certain company are not going to go up. They may even go down and you are expecting that. Therefore, a call can be sold without having bought it before, but you must have the underlying asset, i.e. the shares.
How to Sell Covered Calls?
For example, a while ago you bought 100 shares of BBQ at u$s47 but they are stagnant, as the market was sideways. When you bought them you were aiming to sell them at $50. Because of what happened in the market, you consider selling a call with strike 50 to get immediate cash from the premium. If the price goes to $50 you will have to deliver the shares. Let’s see what results can happen.
1. The shares become worth $50 or more:
In this case, you must sell the shares at that price, which is what you wanted when you bought them. You then receive u$s50-u$s47=u$s3 for each share and what you received for the premium (what the contract was worth when you sold it). This is a good strategy, as you earned more than just the sale of the shares. Remember to calculate the commissions well.
2. The shares are worth less than u$s50:
In this case, you are not obliged to sell them and the buyer will not exercise the right to buy, as he can find the shares cheaper in the market. Therefore, you keep the shares (which you can sell later or when they reach the value you wanted) and the premium you received for the sale of the call contract. This strategy is very good, as many traders do not want to sell their shares, so they sell calls with strikes that according to their analysis will not reach the share price by that date, thus earning recurring income.
Is Selling covered Calls a good strategy?
The good thing about selling calls is that it ensures extra income before the decision to sell the shares and ensures that we will sell them at the price we wanted to sell them for. In addition, it cushions losses when the shares go down, which would be case 2 that we saw. Even if they go down, you received an income, reducing the impact.