Options trading guidelines for writing covered call
CRM as an example for a covered call strategy. Taken together, the synergy of the options income and appreciation of the underlying security has yielded Salesforce is a contentiously debated aggressive growth stock.
Due to its rapid growth, expanding footprint, options trading guidelines for writing covered call partnerships with Fortune companies i. Much of its revenue is deferred as a result of its subscription-based model thus deferred revenue is often discussed on earnings calls. Due to these factors and the difficulty of placing an accurate valuation on Salesforce, options in the form of covered call writing may be an effective way to leverage this growth stock while mitigating downside risk.
Salesforce offers the right balance of volatility, liquidity and a high level of interest which gives rise to reasonable yielding premiums on a bi-weekly or monthly basis.
This set-up bodes well for those who are long Salesforce or a stock similar in nature and desire to leverage options trading to augment returns and mitigate risk throughout the volatile nature of this underlying security. This article is backing my long position in Salesforce while opportunistically and responsibly writing covered calls to mitigate downside risk and generate income. I provide my real life examples embedded into my long position as this stock can be volatile.
Salesforce has maintained a fairly narrow trading range throughout the past year with the exception of a major correction in February. This narrow trading range for a relatively volatile stock can bode well for options traders. Figure 1 — week trading range of Salesforce. Riding the uptrend waves to the higher end of the week range while writing covered calls one can extract additional options trading guidelines for writing covered call in a long position.
This typically occurs over after an earnings beat and rise in guidance. Table 2 — Simplified table of the options contacts on Salesforce stock.
During the week of October 20th,on the heels of very robust earnings from Microsoft, Amazon, and Alphabet Google the entire tech sector benefited and stocks such as Salesforce witnessed a strong uptrend as a result. I wanted to capitalize on this uptrend as Salesforce broke through its week high at the time. This upside buffer was particularly important as earnings were underway. However, I was writing this option at risk due to the increased uncertainty surrounding the upcoming earnings report.
The earnings report would either move the stock up or down in a dramatic move. Salesforce has been growing at a double-digit clip on an annualized basis, and this impressive growth will likely continue in the near-to-intermediate term as cloud-based analytics are the future to any enterprise business more specifically in the CRM space, not to mention the highly acquisitive nature of Salesforce.
In the meantime, as a long investor, writing covered calls in opportunistic scenarios may mitigate these options trading guidelines for writing covered call swings in the stock price while generating income.
Taken together, options income may greatly augment overall returns as detailed above. The author currently holds shares options trading guidelines for writing covered call CRM and the author is long all this position.
The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned.
Kiedrowski is an individual investor who analyzes investment strategies and options trading guidelines for writing covered call analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. Charting The Energies Data Release.
A covered call is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrumentsuch as shares of a stock or other securities. If a trader buys the underlying instrument at the same time the trader sells the call, the strategy is often called a " buy-write " strategy. In equilibrium, the strategy has the same payoffs as writing a put option.
The long position in the underlying instrument is said to provide the "cover" as the shares can be delivered to the buyer of the call if the buyer decides to exercise. And if the stock price remains stable or increases, then the writer will be able to keep this income as a profit, even though the profit may have been higher if no call were written.
The risk of stock ownership is not eliminated. If the stock price declines, then the net position will likely lose money. Since in equilibrium the payoffs on the covered call position is the same as a short put position, the price or premium should be the same as the premium of the short put or naked put. Losses cannot be prevented, but merely reduced in a covered call position. If the stock price drops, it will not make sense for the option buyer "B" to exercise the option at the higher strike price since the stock can now be purchased cheaper at the market price, and A, the seller writerwill keep the money paid on the premium of the option.
This "protection" has its potential disadvantage if the price of the stock increases. If, before expiration, the spot price does not reach the strike price, the investor might repeat the same process again if he believes that stock will either fall or be neutral. A call option can be sold even if the option writer "A" does not initially own the underlying stock, but is buying the stock at the same time.
This is called a "buy write". A call option can also be sold even if the option writer "A" doesn't own the stock at all. This is called a "naked call". It is more dangerous, as the option writer can later be forced to buy the stock at the then-current market price, then sell it immediately to the option owner at the low strike price if the naked option is ever exercised.
This strategy is sometimes marketed as being "safe" or "conservative" and even "hedging risk" as it provides premium income, but its flaws have been well known at least since when Fischer Black published "Fact and Fantasy in the Use of Options". According to Reilly and Brown,: Two recent developments may have increased interest in covered call strategies: This type of option is best used when the investor would like to generate income off a long position while the market is moving sideways.
A covered call has lower risk compared to other types of options, thus the potential reward is also lower. From Wikipedia, the free encyclopedia. Strategies for Profiting from Market Swings 1 ed. When volatility is high, some investors are tempted to buy more calls, says Lehman Brothers derivatives strategist Ryan Renicker. But volatility is also highest when the market is pricing in its worst fears Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative.
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