What Are Covered Calls?

Selling covered calls allow you to make an income off of stocks you own and increase your profit in the long run. But what are they? nnWhen you sell a covered call what you are doing is selling the right for someone else to buy the stock from you at a given price sometime in the future. This could drastically lower your profit potential if the stock suddenly shoots up, but you do get a nice premium for selling that right. Let’s look at an example.nnSay you own stock XYZ, which is trading at $47 and has not been doing much over the last year. You decide you would like to start generating some income off of the stock by selling calls on it. The next month’s $50 call is trading at $2.5.nnYou can sell that $50 call and rake in the $2.5. Once you do this your account is credited the money, but you are on the obligation to sell your stock at $50 if you get called upon to do so by the buyer.nnNow if the stock stays below $50 you probably will not get called out, unless someone feels like buying a stock for more than it is trading at. But if the stock goes up above $50 you might get called out and be forced to sell your stock at $50.nnBut that is not a bad thing is it? You wound up selling the stock at $50 which is $3 higher than when you originally sold the call on. In addition you also made $2.5 for doing this.nnSome people worry about missing huge potential profits, but in reality those large profits only come once and a while. Instead someone who sells covered calls focuses much more on the consistency of doing so rather than missing a potential profit here and there. nnFor more on Covered Calls visit http://www.stocks-simplified.com/covered_calls.html nnFor times to Avoid covered calls visit http://www.stocks-simplified.com/Selling_covered_calls.html