![]() Covered calls are a trading strategy that traders can use if they expect the price of a security to stay where it is for the foreseeable future. While the buyer of a call option expects the share price to go up so that they can exercise the option and make a profit, the other party, who is called the seller or writer, expects the price to fall or stay where it is. ![]() While this will reduce your profits to $92 instead of $100 if the price touches $600 a share, traders still prefer it because of the capped downside and no risk. Your maximum downside is protected, and your maximum loss is capped at $8 only. If the share does not touch your desired target price or falls, you can choose not to exercise the option. ![]() Now, the only capital that you are risking is $8. To buy this call option, you will have to pay a premium, say $8. This means that after a week, you will have the option to buy the share for $500 if you want. Say you buy a call option on ABS with a strike price of $500 expiring in a week. In such situations, call options can be used. What happens if the stock does not rise in a week? Another major issue is that you will be risking the entire $500, and if the stock instead plummets to $250, you will have lost $250. For example, maybe you do not have $500 to risk on a single trade. However, several potential issues could arise here. The ideal way to act on this belief would be to buy the stock, wait for a week, and sell it at $600. You expect this price to increase over the next week and touch $600. Suppose the shares of a particular company ABS cost $500. This can be used in two ways, and they have been discussed below with the help of an example. If buying a call option confers the buyer the right, but not the obligation, to buy the underlying security at the predetermined strike price. To completely understand what a covered call is, you need to understand what a call option is. How Does a Covered Call Calculator Work?.
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