Selling Covered Calls
A covered call is an options strategy whereby the trader holds a long position in an underlying asset and writes (sells) call options on that same asset. The trader will receive a premium for selling the call option, which can offset some or all of the downside risk of holding the long position in the underlying asset.
If the underlying asset price decreases, the trader will be able to offset some of the loss by selling call options.
Investors often start selling covered calls to generate additional income from their stock portfolios. In fact, covered call writing can be a good way to generate income from an existing long position in a stock or other asset.
However, the key risk of selling covered calls is that the trader may be called away from their long position if the underlying asset price increases above the strike price of the call option. This can result in a loss if the trader had hoped to continue holding the long position and benefiting from further price increases.
Nevertheless, selling covered calls can be a good way to generate income on an existing long position while still providing some downside protection.
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