Risks of Covered Call Writing

1. Stock price falls sharply. If the underlying stock falls sharply, you may end up with an unprofitable transaction. There are techniques to minimize this risk, such as buying your calls back, but they will be discussed later.

2. Investing "short term." Investing in the market with short term transactions involves risk. The market has a tendency to move erratically and irrationally in the short term, therefore an investor who is investing short term may be hurt by some of these quirky movements. Investors should only invest in stock that they believe in and are willing to hold for the long term.

3. Stock price moves up sharply. Although this is not really a risk of losing money, it is a risk of giving up “potential” profit. For example, you may purchase a stock for $20, sell a $20 call for $2, and make 10% on your money. However, before the strike date, the stock moves up to $30. You have now profited 10%, but had you just held the stock you would have profited 50%.

1. Introduction
2. Definition
3. Understanding Options
4. Key Terms
5. The Basic Concept
6. The Simplified Covered Call Process
7. Benefits of Covered Call Writing
8. Risks of Covered Call Writing
9. Calculating A Return
10. Getting Started