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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: ValueGuy who wrote (5174)	5/18/2011 4:45:54 PM
From: dealmakr	Read Replies (1) of 5205

"IMHO, a covered call strategy is great as you can generate pretty good income while waiting for your stocks to rise in value. However, one of the things I found out recently is that with some stocks, the potential income you may gain may still be outweighed by unrealised capital losses, for example after a negative earnings report (e.g. NVDA)." Faizul, A CC strategy to generate additional income is a play if the stock has a neutral or slightly bullish bias. If the trend is neutral or bearish a CC will allow some capital protection by capturing the premium and offsetting it against any capital loss in the underlying. This doesn't mean that when you have a high beta stock like NVDA going into an earnings event that the premium of the call can protect you from any steep selloff. Hedging by buying a protective put does cost money, but you have to look at the volatility of the stock and options going into an event to price the protection accordingly. If you track the volatility of prior moves of the stock at earnings and see how the ATM calls & puts are priced it may give you a clue as to how much movement is being priced in. Good Trading dealmakr

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