Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks

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Covered call trades are not really “conservative.” Buying 100 shares of stock typically involves a significant outlay of capital. If the stock price then falls precipitously, the dollar loss on the trade can be substantial. This loss is exactly the same as if a naked put was sold and then the stock price fell. Also, the potential profit from a covered call is capped, just as it is when a naked put is sold.

The month-by-month management of covered call trades can be tricky. Some months are going to require a tough decision as the expiration date arrives.

One advantage enjoyed by a covered call over a naked put is that you do participate in any dividend payments. Naked put positions enjoy the advantage of tying up less cash and creating ...