Options Can Help Reduce Market Volatility

Let’s look at a covered call.

Example of a covered call options strategy

Let’s say you bought stock “A” at $40 and it increased in value over the course of a few months to $60. You’d like to sell and take your profits, but you wonder if you couldn’t squeeze a few more dollars out of it. To do so, you decide to sell a call option. You’re selling the right to buy your shares to another investor at a certain price — say $62 — during a specified time period. It’s called a covered call because you actually own the shares that you’re selling this call option on.

If the shares don’t increase or decrease in value very much, you won’t be too concerned since you’ll still collect a small fee from the investor who bought the call option. Plus you still keep your shares in the stock! If the stock price rises above the price you agreed to sell at (the strike price), you get more than you would have if you just sold ($62 vs $60) instead of selling the call. If you were planning to sell the stock anyway, it’s ideal.

But not everything always goes as planned. If the stock jumps higher than your strike price to $70, than you can miss out on the upside beyond the strike price of the option. In this case, you’d miss out on $10/share. And remember that you’re not protected if the stock price falls (to say $56) because the person buying your call will not want to purchase your shares at the strike price of $62. Why spend $62 for a $56 stock? One upside though is the small income you received from selling the call option. That would help soften the blow a little but make no mistake, options trading involves risk! Make sure to educate yourself first!

This is just ONE of hundreds of options strategies

Take a peek at optionsXpress and open a FREE account to practice your own options strategies. You’ll have access to their market information and trading strategies with live webinars and 200+ online videos. Plus, with optionsXpress:

  • You can trade it all — stocks, bonds, mutual funds, options, futures, and ETFs — all in one account.
  • Accounts are FREE to open, with no minimum balance requirements.
  • Real-time market data with free streaming quotes.
  • Unlimited access to web, mobile, and desktop platforms at no additional cost.

optionsXpress - Preserve Cash