Free guide - Using covered calls could help generate income from your existing shares.
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As an investor, your portfolio returns don’t need to rely on market movements to profit. Using the covered call you could help boost your portfolio returns – especially when the market is flat and prices are moving sideways. This free quick guide will help you understand: • What is a covered call, • How to construct a covered call against stock you currently own, • Ways that this trade can help generate income from shares.
Transcript of Free guide - Using covered calls could help generate income from your existing shares.
EXCHANGE TRADED OPTIONSPart 3: Covered Calls
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Covered Calls1
Covered Calls are an options strategy that can be used to generate cash using the collateral value of the shares in a portfolio.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Covered Calls2
A covered call strategy involved selling calloptions to open the trade.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Covered Calls3
Call options are sold above or at the shareprice in the view that the share price willgo sideways to bullish.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Covered Calls4
Call buyers have the right to buy theunderlying stock.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Covered Calls5
A call seller will receive a credit to entera contract with the buyer
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Covered Calls6
They will be ensuring the buyer that they willsell stock to them at the strike price of thecontract.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Profiting from Covered Calls7
To profit we set the strike higher than the price paid for the stock, as well as the current share price.
Calls Strike Price
Current Share Price
Price paid for stock
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Profiting from Covered Calls8
As a result, if the option is exercised, you willsell your stock for a profit, plus you keepthe credit received to enter the contract.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Profiting from Covered Calls9
If the share price goes sideways and isbelow the call strike on expiry, the optionexpires worthless.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
But you keep the credit that you received by opening the contract.
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TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
An example Covered Call11
It is May and we own 1,000 XYZ shares that we bought at $35.10.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
An example Covered Call12
The share price is trading at $36.00 so we decide to sell to open a call option with a strike of 36.50 in June for .60c Credit per option.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
An example Covered Call13
XYZ Share Buy Price 35.10
Sell to open 36.50 June Call for .60c CR
XYZ current share price 36.00As we own 1,000 Shares, we can sell 1,000 call options or 10 contracts using 100% of the collateral value of the shares.
This will create a credit of $600.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Scenario One - The Share Price Falls14
The share price falls and is trading at 34.90 on June expiry. The options will expire worthless.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Scenario One - The Share Price Falls15
In this situation, you keep the $600 but the XYZ shares have lost .20c of value or $200 so you profit $400 even though the share price has fallen.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Scenario Two - The Share Price Rises16
The Share price rises to $37.00 on June expiry. We get exercised on the option so we will sell the stock at 36.50.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Scenario Two - The Share Price Rises
We will make $1.40 on the stock or $1,400; we also keep the credit from the call option we sold of $600. This equates to be a $2,000 profit for the month.
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TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Scenario Three - The Share Price Falls
The share price falls and is trading at 34.00 on June expiry. The options will expire worthless and we keep the $600 but our XYZ shares have lost 1.20 of value or $1,200.
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TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Risks of Covered Calls19
The risk is the same as holding the shares, as if the share price falls then the value of the shares will go down.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Risks of Covered Calls20
The credit from the options will help reduce the loss compared to just holding the shares.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Risks of Covered Calls
There are many different ways of managing and timing the entry of a covered call,which will yield different results.
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TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Risks of Covered Calls22
You need to be prepared to sell the stock if needed for this trade to work.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Risks of Covered Calls23
Covered calls can only be made on a stock that has exchange traded options.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Conclusion24
Portfolio returns do not have to rely on market movements to profit.
TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
Conclusion
Investors can still achieve strong returns, even when markets are flat by selling call options against stock holdings.
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TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788WEB: www.traderscircle.com.auEMAIL: [email protected]
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32Warnings and important information.Any advice contained in this communication is general only and does not consider your objectives, financial situation or needs, and you should consider whether it’s appropriate for you. If you are thinking about acquiring a financial product, you should consider our Financial Services Guide (FSG) at www.traderscircle.com.au and the relevant Product Disclosure Statement (if there is one available) first.
Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only act on our recommendations if you are confident that you fully understand what you are doing.
Past returns do not reflect future returns, and it is also possible to make significant losses. We employ expert traders and use strategies that maximise returns and minimise risk. However, there is always a risk of loss when trading and investing. This is general information, and is not prepared for your specific investment objectives, financial situation or needs. Consult a licensed investment adviser before making investment decisions. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041.
