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If you have SPY, as an example, the current price is $570.70.
You could sell a call for expiration on 4th October 2024 at strike price of $577. You would receive $2.10 for each share. In the example of 1537 shares, you could sell 15 calls, each of 100 shares. You would collect $2.10 x 100 x 15 in this case. That is $3150. There is usually a $0.65 fee per contract you would pay to enter this trade.
If SPY stays below $577, you keep this money and can sell contracts again. If SPY goes above $577, you will get called out and get paid 1500 x $577. As long as SPY stays below $579 you make out. ($577+$2.10 forvthe calls you sold)
BUT, if you get called out, you pay taxes (Long Term Capital Gains or Ordinary Income) on your gains.
At any time, you can buy the calls back to avoid this.
1. A covered call requires you to have and keep the shared when you open the trade
2. Every call you sell requires 100 shares. So if you have 1537 shares of SPY or QQQ for instance, you can sell 15 calls against them
3. A call can be sold for many different "strikes," which is the price of the ETF at the time the sold call expires.
4. The further above the current price of the ETF, the lower the value you receive, and the lower the risk your shares will get called away.
5. This strike price is the value you get if the person you sell the calls to exercises the call. They are calling the stock from you.
6. The longer out in time you sell the calls, the higher the price of the call, the more you get. But that means their is more time for the stock to reach that price.
You can't lose actual money selling covered calls, but you could lose potential profit.
1. Have 100 shares of a security with an active options market (look for monthly or weekly options with a good volume)
There may not be a secondary market for thinly traded index funds. You need something with volume like SPY.
2. Apply for options with your brokerage. They will ask you some questions to make sure you understand the risks of options. This approval is easier if you have a large account. Level 1 options are easiest and open up covered calls. Level 2 opens up cash secured puts and the ability to buy calls and puts. Level 3 options allow for more complex option chains. Level 4 is high risk items like naked contracts.
Some accounts like retirement accounts only offer level 1 and 2 option trading. Full featured brokerage accounts will usually make you ask to turn on the options features and may require higher account minimums. For example, on my risky account I have approval for level 3 but usually only operate in level 1 or 2.
3. When you have the options actions turned on you will want to pick SELL TO OPEN for a call. You will need to pick a date and a strike price. The basic options course from Tasty Trade will go over this and more. As a general rule you should price so you are ok if you get assigned. (a price you are happy selling at)
When you sell a covered call you get cash money right away. The shares associated with the contract become reserved and untradable. There are several ways to close your contract. You can buy to close your contract early, get assigned early and recieve the strike price x 100, expire "in the money" at the end of the contract, then get assigned and get paid for your shares or the contract will expire worthless and you get to keep your premium and sell again. Some brokerages auto close and assign contracts.
4. Check out other "theta gang" strategies as you get more confortable. Time decay strategies are essentially the inverse of the "wall street bets" crowd.
Do you have 100 shares of any index fund or particular stock?
If you have 100 shares, you can write covered calls against them. The risk is that you'll miss out on potential profit if one of them makes significant gains.
Yes, I have 1,000s.
So how do it do it? Explain to me Iike the dummy I am! 😂
I assume I write the call for 100 shares for example. I ‘sell’ the shares for the stated period and earn the premium on selling them. If the stock price falls, it’s mitigated by the premium (up to the total of premium), if it rises, I lose the gain, but still ‘profit’ the premium?
Your brokerage can help you execute this.
I'd add that all accounts can have any level of option trading rights. However, because you can't use margin the account value limits the option strategies.
OP, to do covered calls, you only need level one. Most good brokers will limit you to level 1 and 2 until you either have traded options for a period or learned trading material.