I guess I will address this question to Jeremy since he is the one that brought it up. I believe I am beginning to grasp the options concept and how they work. The cover call sounds like an attractive idea, but what are the down sides as far as how much risk is there, and in what cases to you lose money? Here's where I am with options - I think they are great IF you know what you're doing. I think with some time I may feel confident enough to "dabble" with options. I am trading with money I am planning on eventually putting down on a house someday, so I would like to keep my risk in the low to medium range. With that being said, I also know with more risk comes higher potential for returns - that is just not the route I feel comfortable taking right now with this money. I would really like to learn about and hopefully profit from options, but if there are ones that are less risky than others, they are probably the ones I would be interrested in.
Thanks to All
2 comments:
I'll let jeremy answer in more depth (perhaps a post on how to execute a covered call?) -- but in short C Calls have limited to no risk. Here's why -- the only money you stand to "loose" with this strategy is if the stock rises above your written strike price and your contract is exercised. Therefore, if you sold a $5 strike and the stock went up to $5.10... you would "loose" that extra $0.10 you could have theoretically sold the stock for. If your contract is not exercised... you keep the option profit as well as your stock shares!
Well I had a nice response and blogger froze on me. Go figure.
In short Jon you can't really loose money on a C. Call. All you could loose would be the risk of your underlying stock going down lower than you want to hold. I'll explain later when I can explain more about how options work.
As for options being risky - I say it depends on what you consider real RISK. Have you looked at BSC recently. A $24 drop in one day - over half of the value in one day. If you're not trading with stops, and if you're not watching it intraday that cost you a lot of money. If you are trading with options and you could control the same shares for roughly $4-6 the most you could have lost would have been $6. It's all in perspective. To top it off had you been trading options you could have bought puts and made a butt load on the way down.
I'll have to work on some explanations on options soon.
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