A covered call option is the safest option to trade. This call trading strategy allows you to sell a call and purchase the underlying asset to minimize risk exposure. Note that a call option is only covered if the seller is the actual owner of the underlying asset.
When you sell the call option on underlying assets that you own, you will earn extra income that you can use to offset any losses expected from a dip in the asset price.
You can think of it as the call option seller being “covered” against any expected losses if the asset price collapses.
The benefit of owning the underlying asset would be twofold. The profit you stand to make by holding a covered option is limited to the increase in the asset price. However, you are protected from any loss you may incur from declines in the asset value.
How do you avoid loss in options trading?
You can avoid loss in option trading by covering your call option on an underlying stock or any other assets you already own. Here are other strategies you can use to avoid making losses in options trading:
- Sell your options as soon as possible – That is because options have a preset expiration date, so you cannot purchase and hold onto them as long as you want. Both stock price falls and looming strike prices will eventually affect your ability to generate income from your trades.
- Don’t hesitate to cut your losses as soon as possible – Whether there’s a rising stock price, stock falls, or poor underlying security, it pays to be realistic and cut your losses sooner rather than later.
- Do not sell call options on assets you don’t own
- Sell your options at the extremes
- Avoid being a stubborn seller who waits until the last minute to sell
What is the most profitable options strategy?
Selling call options and out-of-the-money put options is the most profitable options strategy. This options strategy makes sure that you get the most significant returns on your options while reducing your risk. Traders and investors that use these bearish option trading strategies can realize around 40 percent returns annually.
Selling calls can also yield for more return on investment objectives when you apply neutral option trading strategies. Remember, that guaranteed premium paid on sold option calls can help mitigate the losses. That makes this options ideal for risk averse traders.
What is the riskiest option strategy?
The riskiest option strategy is to sell call options on underlying stock’s price or assets that you don’t own. This transaction is often known as writing naked calls or selling uncovered calls.
The higher amount of premium you will receive from the sale is the only advantage that comes with this strategy.
What is the safest way to trade options?
Covering call options, meaning selling call options against stocks and assets that you own, is the safest way to trade options. You can reap maximum profit when the bull call spread favors both your options and the associated asset.