themselves against sudden changes in
security prices. With this trading option, the person who holds a security,
such as a stock, sells the rights to the security at a strike price set in the
future in exchange for a premium. When the price of the security does not
become lower than the strike price, the call writer not only gets to keep the
premium but also the rights to the equity. Traders and investors who write
covered calls often use a covered call
screener to enable them to more easily find covered calls that are suited to their investment strategies.
Depending on their goals, there are
different strategies that traders employ for covered calls. There is the
supplement return strategy wherein the call writer sells covered calls primarily for the extra profits they can derive from
the premiums. The call writer believes and expects that the price of the
security will continue to rise but not fall. The call writer expects that he or
she will hold onto the security.
Another motivation for call writers to
write calls is to protect their portfolio against losses. This strategy is
often employed after a rise in the value of the security. By selling their
securities through covered calls, traders can protect their portfolio against
sudden and unforeseen decreases in prices of securities.
Traders who engage in covered calls also
speculate about the prices of securities they are selling. Traders can double
their income by selling covered calls successively. It is likely that traders
can double their profits if they sell covered calls that have a 10% return in a
month. These traders usually consult call screeners in order to find calls that
have the highest returns.
Like any other investment strategy, covered calls have risks. Though it is
considered to be a conservative strategy, calls can also make a trader or call
writer lose money if the security price drops significantly. Calls for highly
volatile securities are riskier compared to writing calls for securities with
low volatility.
Writing a covered call can be a great option
for traders who want to maximize their profits and spare their portfolios from
losses brought about by sudden drops in the value of securities. Using a covered call screener makes it much
easier for traders to find, buy, and write covered calls that are appropriate
to their investment strategies. Sign up for a complimentary trial for Barchart’s screener at barchart.com.
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