The covered call option is known to represent a conservative investment strategy that allows for limited reduction of risks of ownership in regard with the underlying stock.
The key question is-can it be termed a suitable strategy for just about anyone? The answer depends on your investment objectives and expectations.
Covered calls are most frequently used by professional investors that hope to earn a steady income through the premiums, and create a buffer against unforeseen changes in the market conditions.
However, those amateur investors who enter into stocks trading to gain immediate high returns may not benefit from this strategy.
This is because even though it entails relatively lower risks, the maximum possible benefits are also fairly limited.
Therefore, before making a decision about writing an option, it is best that you carefully examine your own expectations and investment objectives.
And only if your needs correspond with the outcomes that the investment strategy can deliver, should you consider this investment strategy.
Will Your Money Be Safe? A covered call option is supposed to be a more conservative strategy that provides the stockowner with some protection from unforeseen fluctuations in the stock value.
However, for one to say they represent a very safe strategy that is close to being foolproof, would be very misleading.
Unfortunately, some novice investors often fall prey to misleading advice and enticements that suggest call options are absolutely safe, and can in no circumstances entail losses.
It is important to understand that writing an option can provide the stock seller only a limited amount of protection.
If the market price per share goes up sharply, or falls substantially, the stockowner will most definitely have to face real or virtual losses.
Having said that, it is true the strategy is a relatively safer one, as compared to other investment models.
At the end of the day, you must understand that it is not 'risk-free' in any way.
When To Use The Strategy? Different investors and experts have varied opinions over this question since technically call options can be written and exercised under any market conditions.
One more broadly consented upon view point is a stock seller should usually write a an option when the market value of the underlying stock is unlikely to experience much range.
If the market price per share does not vary much in relation with the predetermined strike price, the investor is most likely to benefit.
Therefore, the call option strategy is lucrative only when the current market value is not in much deviance from the predetermined strike price.
If you select an averagely positioned strike price in a period when the market is not likely to witness much fluctuation, you are most likely to get better returns.