High Yield Covered Calls Are Good For Your Portfolio

Many traders who are conservative use a strategy called “covered calls”. One type that increases the return on investments is high yield covered calls (HYCC). However, this strategy can be confusing and requires some research.

For those who are new to the stock market, it is important to remember that stockholders have rights. For instance, they can buy and sell stocks at any time for the price currently set by the stock market. When using a HYCC strategy, this right to make transactions is sold to another person for a predetermined cash price.

This sale price is called the strike price. The purchaser is allowed to buy your shares any time before this agreement expires. The call option is actually a contract that sets the strike price and allows the purchaser to buy underlying stock at the price the stockholder sets. In cases where the seller owns the underlying shares outright, this exchange is considered “covered”.

HYCCs can result in a handsome profit, especially for investors knowledgeable about this process. With a volatile market, the premiums on call options are much higher and can yield as much as a 5% return. However, it is important to evaluate this type of transaction carefully as it is easy to take a loss as well.

There are only three directions an investment can go. It can move up, remain stable, or decline. All of these influence potential profits. By adding the HYCC, the outcome can turn in an investor’s favor. This is because when stock is offered through this option at a future date, with a preset price, there can be at least some guarantee of a good return on the investment.

A premium is charged when using a HYCC option that is paid by the buyer. The transaction will result in the strike price plus the premium. Although less than the maximum may be recouped if stock prices rise significantly, if they decline or remain stable the seller is ensured they will get more than they paid for each share. If the buyer decides not to close by the expiration date, however, the seller still collects the premium.

For those new to this concept, high yield covered calls may seem confusing initially. It is important, therefore, to use sites that include tutorials. The visual aids and demonstrations provided help with understanding how this strategy works.

To find out more about covered call strategies, go to Born To Sell. Know what’s better than bond interest? Covered call investing at Born To Sell.

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