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If you sell a covered call you have no risk right ? Aren't you just capping potential returns in exchange for immediate premium ?
by bionsystem 6y ago
If you sell a covered call you have no risk right ? Aren't you just capping potential returns in exchange for immediate premium ?
- belltaco 6y agoI wouldn't term it as "no risk", anything you do in the stock market carries risk, it's just a different risk. And it's not even a capped risk, if the stock goes up to infinity most of the gains will be captured by the person that bought your call, and you'll be only left with the shares. >Aren't you just capping potential returns Yes >in exchange for immediate premium ? That's not the main goal though, the main hope is to have them expire worthless so you can pocket the premium(or just going down in price over the option time period so you can flip it before expiry). So the best case is the stock going just under the strike price at the time of expiry. It wouldn't really matter that much if the premium wasn't paid out immediately but was paid at expiry to you by your broker.
- fractionalhare 6y agoNo you do have risk, it's just defined. The risk is equal to the collateral, which "covers" you in the event you're "called." This means the price of the underlying has reached the strike price of the option contract, and the counterparty has exercised (as they almost certainly would). Then you are obligated to provide 100 shares of the underlying * the number of calls sold to the counterparty. If that occurs, you lose money - the amount of money you can lose is your risk. In the case of selling covered calls it's capped to the value of your collateral, but it's still risk.
- bionsystem 6y agoI see what you mean, thanks for clarifying.