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It's easy for new investors to dismiss options trading as "too risky." And that's perfectly understandable.
But once you learn some options trading basics, it can become a valuable source of income. Today, we're going to go over writing covered calls for beginners.
The funny thing is that options, when done correctly, can actually lower your risk. They can even provide a stream of income to improve your portfolio's total return.
As we said, however, let's start with the basics…
What Is a Call Option?
A call option is simply the right, but not the obligation, to buy a specific stock at a fixed price by a predetermined date. A put option is the same, except that it is the right to sell that stock. All of those parameters are part of the option's name.
For example, you could buy a call option on Coca Cola. The contract might allow you to buy shares of stock for $50 (called the strike price) by the expiration date of Sept. 18, 2020. The stock currently trades at about $48.
If the stock moves above $50 per share by September, you make a profit. Simple, so far.
The risk is if Coke does not rally. If it is not above $50 by September, the option will expire worthless. The good news is that you only lose the amount you paid for it, which is typically very much less than the price of the stock itself.
Now, here's a way you can better manage your risk with call options.