05 April 2021 - Earning Money From Covered Call and Not Naked Call.

Previously, I have shared how I made money regardless of market direction and I received some queries on how do I short a Call Option and if it is safe.

Firstly, I must clarify that I only support Covered Call as I don't have the balls to do a Naked Call Option. The difference between them are that Covered Call required you to have 100 shares of the stock for the Call Option that you are planing to sell. If you don't own 100 shares of the stock for the Call Option that you are selling, that will be Naked Call and it can be very dangerous. 

Selling a Call Option will cause you to have the obligation to either (i) Sell 100 of the stock if the option is exercise or (ii) buy back the Call Option before the expiration date. 

Example (Xiao Ming don't own any Tesla Stock) 

Xiao Ming foresee that Tesla won't hit 700 by end of 09 April 2021 and decided to sell a Call Option of Tesla at strike price 700 which will expire on 09 April 2021. Based on 01 April 2021 closing price, Xiao Ming will be receiving 790 USD for selling that particular Call Option. 

Now if the price of Tesla continue to remain below 700 on 09 April 2021, Xiao Ming can happily keep the 790 USD. However, if Tesla soar pass 700 and closed 750 on 09 April 2021, Xiao Ming will be in deep trouble. Based on price estimation, the particular Call Option will be worth 50 USD and it will mean that Xiao Ming will either (i) need to buy 100 shares of Tesla at 750 to sell to the buyer of his option at 700 each or (ii) close his "Naked Call" at 5, 000 USD (as the Call Option is trading at 50 USD). 


As you can see from the example above, this is the reason why I don't encourage Naked Call as I simply don't have the Balls. There are many GURUS out-there saying that it is safe so long you "Follow The Chart". Personally, I feel that "Naked Call" is simply gambling and nothing else. 

By having a Covered Call, I know that even if the price of the stock hit my strike price, I am safe as my holding will simply be "Forced Sold".

The video below from the beautiful Guru who correctly explained how to use a Covered Option Strategy. 


No comments:

Post a comment