Covered Call Management

November 11, 2022


Covered Call Strategy

Covered Call Management is a strategy that Lyons Wealth Management uses to generate income and protect portfolios. It involves writing call options on stocks that are owned in the portfolio. The premiums received from writing the options offset any potential losses from the stock price drops. Covered Call Management can also be used to help reduce the cost basis of a stock position, the same when there is stock price appreciation.

People use covered call strategies for a variety of reasons. Some people use them to generate income, and profit potential, while others use them to protect their long stock position. Still, others use them to speculate on the market's future direction. Whatever the reason, covered call strategies can be an effective way to manage your portfolio.

There are a couple of things to remember when using covered call strategies. First, you need to make sure that you have a well-defined exit strategy. This will help you avoid getting stuck in a losing position or cover any underlying shares. Second, you must be aware of the strategy's potential risks and rewards before entering it.



Comprehending Covered Calls

One can say that a covered call strategy is an impartial strategy. This means that the one investing anticipates a nominal gain or decline in the underlying stock price during the span of the written call option. This strategy happens when an investor has a short-lived unbiased view of the acquisition and, because of this, holds the asset long and eventually goes through a short position by generating earnings from the option premium.

Let's say an investor plans to carry the underlying stock for a long time and does not foresee a noticeable price increase in the short term. Then they can earn income or max profit (premiums) for their accounts while they stay out of the lull.

A covered call strategy functions as a hedge to a long stock position, allowing investors to target to earn through the premium received for writing the option. It is worth noting that forfeited stock returns once the stock raises the option's strike price.

They are also bound to deliver 100 shares at the strike price if the investor chooses a covered call management that is not practical for bearish investors, nor is it beneficial to bullish investors.

Bullish investors are expected to be better when they do not write off the option of the store; as we know, this can lessen the overall profit of the trade if the stock price spikes. Likely, if investors are bearish, they may be more suitable when they sell the stock since the premium income for writing a call option will be small to offset the loss if the stock rises.

Can You Lose Money on Covered Calls?

If you want to know, the highest loss per share on a covered call is calculated by deducting the option premium received from the first asset in the stock. But what are the pros and cons of covered calls? Lets review:

Covered call management causes more profit on shares you may already have in your portfolio. This also designs potential profit on claims that are trading sideways. A covered call buyer can also have security on capital when selling covered calls. The yield you receive from optioning covered call positions is yours; however, this was executed.

On the other hand, when you use a covered call, you limit your profit potential when the stock price closes way above your covered call position. If the stock price drops and you want to sell your position, you compound losses. If you must repurchase your call options, this may create further losses.

Protecting against losses does not guarantee to avoid losses, but a covered call will help you minimize your loss or stock price decline.

Is Covered Call a Good Strategy?

When you use covered calls, you can be assured that you are using a strategy operated by new and seasoned traders. Since it's a limited-options strategy, this is frequently utilized as an alternative to writing "naked" calls. Hence, brokerage companies do not put many rules on this strategy.

In covered call management, we will suppose the role of the option seller except for unlimited risk since we already own the underlying stock. This gives a peak at what we call a "covered" call since you are covered and protected against losses if the option ends up in the money and is exercised.

Covered calls demand two steps. You already need to own the stock. It does not need to be in 100 share blocks, but you will ensure it has to be at least 100 share price.

You will need to sell a covered call, go through covered call writing, and make one call for every 100 shares of stock.

When you choose the covered call method, you must be aware of considerations and the difference between owning the stock outright.

You get to retain the premium you accept when you sell the alternative, but if the store goes above the strike price, you cap the amount you can make.

Options Strategies to Know

Now that we 've looked at the basics of options income strategy, let's take a closer look at some specific methods that can be used to generate income and grow your portfolio

What Is Covered Call Strategy With Example?

When you sell covered calls, you are settled in exchange for giving up a part of your future upside. Suppose you buy shares of XYZ stock for $50 per share, foreseeing stock moves to $60 in a year. You're also ready to sell a covered call at $55 in five months, accepting another upside while taking a short-lived profit.

Why Use Covered Calls?

Covered calls, also known as "buy write" is a share-for-share basis that offers investors at least three upside potential/potentials. Allowing neutral earnings to bullish investors will enable you to deal with stock prices and sell them higher than the current stock price in rising markets, with considerable downside protection.

Let's review; investors are supposed to be game in:

  1. Willing to own the underlying stock.
  2. Ready to sell the stock at the effective price.
  3. Be satisfied with the estimated static and if-called returns.

It is expected that losses will still happen in covered calls below the breakeven part. Also, if the stock price rises more than the effective selling rate, you may encounter opportunity risks.

What Does Lyons Wealth Management Do?

Lyons Wealth Management serves discretionary asset management to all investors looking for help in having a disciplined, value-driven approach to managing your management and investment savings. They fully understand the hindrances and limitations investors encounter in holding stocks in the current market price. To learn about breaking them down into smaller core pieces, let us listen to how you want us to manage your wealth today. Call us today at Phone: +1 407-951-8710!




DISCLOSURE ¹ This statement applies generally to initial purchases of a position. Additional shares of a particular stock purchased at subsequent quarterly rebalances may still remain in short-term holding status (owned for less than one year) at the time of this publication. Broadridge MarketPlace is an investment manager database that serves as an objective, third-party supplier of information. Broadridge MarketPlace's Best Money Manager ranking is a comprehensive survey of institutional money manager performance. To be eligible for recognition as a Broadridge Best Money Manager, performance must be calculated on an asset size, which is at least $10 million in size for traditional US asset classes or $1 million for international and alternative investments. Classifications must fall into one of the categories that Lipper ranks (minimum of 20 contenders). All performance data must be calculated net of all fees. For additional information regarding the criteria used by Broadridge MarketPlace, see Minimum Criteria for Inclusion in Best Money Managers listed in the Disclosure of Lyons Wealth’s separate Lipper ranking history document. This material is for the exclusive use of the person to whom it has been delivered, is confidential, and may not be copied, distributed, or otherwise given or disclosed to any person other than your authorized representatives. This material was prepared exclusively for information and discussion purposes and to indicate preliminarily the feasibility of a possible investment opportunity. This material is not meant to be nor shall it be construed as an attempt to define all terms and conditions of any transaction or to contain all information that is or may be material to an investor. Lyons Wealth Management, LLC is not soliciting any action based upon this material, and this material is not meant to be nor shall it be construed as an offer or solicitation of an offer for the purchase or sale of any security or advisory or other service. Lyons Wealth Management (“LWM”) began formally tracking its portfolio performance as of April 2nd, 2012. Portfolio composite returns are preliminary and are presented on a time-weighted, size-weighted total return basis using monthly portfolio valuations. The composite returns for each LWM portfolio presented herein include all eligible LWM accounts. To be eligible for inclusion in the LWM composite, an account must be fee paying, fully discretionary, and not part of a broker wrap program. New portfolios that are managed to the Tactical Allocation Portfolio investment strategy and meet the composite definition will be added to the composite when fully invested. The composite is not representative of all accounts managed by LWM. All returns are expressed in U.S. Dollars and are presented net of all fees and expenses. The returns reflect the reinvestment of all dividends and interest. The return information presented herein has not been audited or otherwise verified by an independent accounting firm, and past performance of any LWM portfolio does not guarantee future results. No current or prospective client should assume future performance of any specific investment strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may cause the performance results of your portfolio to differ materially from the reported composite performance. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client's investment portfolio. Historical performance results for market indices and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. The information, data, analyses and opinions contained herein (1) may include the confidential and proprietary information of data provider, (2) may include, or be derived from information which cannot be verified by data provider, (3) may not be copied or redistributed,(4) do not constitute investment advice offered by data provider, (5) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (6) are not warranted to be correct, complete or accurate. Except as otherwise required by law, data provider shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use. This report is supplemental sales literature.