The Best 10 Option Trading Strategies

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5. Covered call

A covered call is established by buying a security at the current market ask price and selling out of the money call option. Selling out of the money option has limited the profit generated from this strategy. If the security price continuously goes down, it will cause an unlimited loss. Therefore, stop loss must be set. When the option has come to its expiry, if the security price is not moving up significantly, you still earn the total option premium that you have received. If the security price goes up, sure you will earn a limited profit. If the stock price continuously goes down, it will cause an unlimited loss. Therefore, stop loss must be set. Usually, stop loss is set at the security to ask price after subtracting by the option bid price.
If this security price goes down and passes over the price that you set as a stop loss, the loss that is incurred to you is about half of the total option premium that you have received. This is because the delta value of the out of the money call option that you have sold is about 0.4 – 0.5. The out of the money call option strike price must be the closest strike price to the entering security price.

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