Using In-The-Money Covered Calls For Portfolio Protection

When you invest in ITM or in-the-money covered calls, it can be a safe way to trade. You have the chance to make profits on stocks, no matter which way they go. Here are some ways that ITM covered calls can generate profits for you.

Whenever you sell or write a covered call option, you are the owner of the commodity, stock, or security. This option can be either OTM or ITM. If it is ITM or in-the-money, you set a strike price that is lower that the current stock value. The opposite is true for the OTM or out-of-the-money option.

At first, it may not seem profitable to write an ITM option. Yet, when you take a more detailed look, you will see how it works. For example, you but 100 shares of Widgets Inc for $15 a share. You might write an option contract with $14 as the strike price. Perhaps you are expecting to get as much as $2 premium for each share.

If someone buys your $14 a share option, they are hoping that the stock continues to rise. It is a good investment for them because the option is already in the money and can be exercised at any time. However, if the option is exercised at $14 when the value is $15, there is no profit to be made, once you consider the premium.

If your stock raises considerably in value, you can bet that you will have to sell it, even if it skyrockets. When you sell the stock, you lose one dollar per share or $100. However, you have made $200 from the sale of the option. After transaction fees you still may be ahead.

If the stock drops or stays the same, the option will expire. You keep the stock and you also keep the $200 premium. You can sell options on the same stock next month, if it does not drop too far. In fact, if your stock drops, you may try to sell options with a higher strike price, but it may be difficult in some cases.

If you are looking into stock or commodity options, you may wish to think about covered calls. In fact, in the money covered calls can be an effective and safe way to trade on the market. Maybe you have some stocks that you think will not move much in the next month. An ITM option can make profit for you whether the stock raises or lowers in value.

To find out more about covered calls, visit Born To Sell. If you like covered call investing you are welcome to check out Born To Sell.

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