Sunday, October 14, 2007

Covered call Vs Call option

Tonight, I want to share some of my research on investing stock options. In particular I focus on CALL options, which is generally works the best when market condition is a rising bull market. You don't want to do CALL option when the market is sinking downward.
Price: For writing covered call purpose, first you must own the underlying shares of stock. Because each contract require 100 shares, the amount required to invest is reduced if the stock price is lower (<$20). Plus, the power of leverage will work better. For call option, you want the stock price higher (>$50) because they are less volatile on downside and solid on the up side.
Option Period: You don't want your option to be "call out" when you're writing covered call, so you'd like the period as short as possible. On the other hand, you want to give it more time to comes up in value when you're buying option call
Risk Level: Covered call is less risk since you're owning the actual stock. You can always wait for stock to bounce back. But in call option, when stock price drops, AND you're near expiration day, you could have high probability of losing your entire investment (premium)
Type of stock: You want a slow price appreciation in covered call because you don't want to get call out. But you want the fast price appreciation type of stock in buying call option to get the maximum gain
Potential return: Every time you write a covered call, you have limited the gain you could make. Your gain is equal the sum of premium you receive plus the difference between strike price and your purchase price. In option case, your return is unlimited, depending on how much stock risk before your options expire
Strike price: The closer the current price, the more premium you will received in covered call case. In opposite, the further out of money, the less you 'll pay for the option premium.
That's all the points I 've summarized as a guideline for investing call options. Hope you'll find it useful.

2 comments:

Unknown said...

Option is kind of interesting topic but also takes time to understand. But it is still nice if you discuss in the future.

529pm said...

Basically, the idea is for stock, we've to guess the price 's direction. for option, we have to guess both price and time. It's more complicated but also more rewarding once you understand it. Keep on learning!