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Posted April 15, 2009 (09:34PM)
The strategy for a covered call is basically this. You buy the stock, you think it will remain stagnant, go up a little, or possibly go down a little.
The call you sell gives you a premium for selling. This premium is a slight buffer for loses you might incur from the stock dropping in price, but if it drops dramatically you're shit out of luck. If it rises a little, but doesn't go past the strike price, that is good because you got the premium, but don't have to get rid of your stock, and you keep the profit on the stock. What you hope for is the option to expire, so that you can keep the stock and premium, and profits incurred by the stock.
If you expect the stock to explode, you do not want to be owning the stock at the same time as selling a call.
Because if the stock explodes and rises, you can't collect the profit on it, and since you sold the call your profits are capped to the premium, plus the profit you got from the stock below the strike price, which would be nothing compared to the profit you could have made.
In that situation it would be good to own one or the other. If you bought the call option from someone else, he would be in your shoes, but the option would have increased in tremendous value, you could either sell the option to someone else or exercise it.
Or you could have just had the stock in the first place.
What I wonder is why more people don't exercise their options? Is it because all of their money is tied up in other options? Because if they had the money to exercise the option, wouldn't it be better to leverage their profit by doing so?
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