Binary Options Covered Call Strategy

Binary Options Covered Call Strategy

Submitted by adil on Mon, 12/22/2014 - 14:28

Most of the successful traders are of the view that an ideal investment is one that offers limited risk and a higher probability for making profit. Those traders who are aware of the benefits of options understand that they can be used to generate acceptable returns and also provide above-average amount of downside protection. In equity-based investments, the technique used by traders to achieve this objective is called ‘covered call’.

Covered Call
For developing an understanding about covered call, it is essential that first you must fully understand Options. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. There are two main types of Options, Calls and Puts. The buyer of a call has the right to buy the underlying stock at a fixed price till the option contract expires. On the other hand the buyer of a put has the right to sell the underlying stock at a set price until the contract expires.
Every time you sell a covered call, this means that you are in possession of your own shares of the underlying stock and the right is being sold. In order to buy that stock at a fixed price you must keep in mind the duration till which the stock expires. The value of price is not effected by the volatility in the market. If the stock is not owned by you, this will make the proposition much riskier and this is referred as the naked call. The covered call technique is also known as buy-write.

How this Strategy works?
One of the most promising feature of the covered call strategy is the fact that the covered call writer does not have any risk of losing money. If the value of the stock rises, there is a possibility of missing out on large gains. For better understanding let’s consider an example. In November you already own 100 shares of ABC Company, which is currently as a $30 share. If you make a decision to sell or write one call, which covers 100 shares of the stock, you will earn profit. If you owned 200 shares of ABC Company, you have the choice to sell two calls.

Strike Price
If you have decided to sell these shares at the price which was previously agreed upon, than this price is known as the strike price. A number of strike prices will be visible on your screen every time you look-up the options. The strike price you choose determines how much premium you receive for selling the option. With covered calls, for a given stock, the higher the strike price is from the stock price, the less valuable the premium. After you have decided on the most suitable strike price, you are also given the option to choose the expiration date. This price is generally the third Saturday of the expiration month.

Some traders consider covered call to be a very complex strategy, but this is a very good technique for reducing your risks.  As the primary objective of covered-call writing is increased income though stock ownership, the return on investment are both essential elements in determining which approach is best to use.