When it comes to options trading, there are a few different strategies you can use: long calls, short puts, and covered calls. Each has its own benefits and drawbacks, so it’s important to understand the differences before you start trading. In this post, we’ll take a closer look at long calls and covered calls, and explore the pros and cons of each strategy. By the end of this post, you’ll be able to decide which strategy is right for you.
What are long calls and covered calls
A call option is the right, but not the obligation, to buy an asset at a specified price on or before a certain date. A long call is simply a call option that you purchase with the intent of profiting from an increase in the underlying asset’s price. A covered call is when you own the underlying asset and write (sell) a call option on it. This can be used to generate income if you are bullish on the stock but don’t think it will rise enough to make your long call profitable. If the stock does rise, you can make money from both the long call and the covered call. If the stock falls, you will still profit from the covered call as long as the fall is not too great. In this way, writing covered calls can help to protect against losses in a falling market.
The benefits of each
Here we will explore the benefits of each type of call option.
A long call provides unlimited upside potential, meaning that the holder’s profit is limited only by how high the stock price rises. This type of option is best suited for investors who are bullish on a particular stock and believe that it will make significant gains in the future.
A covered call may have limited upside potential, but it also has downside protection. If the stock price falls, the investor can still hold onto their shares and wait for the price to rebound. This makes covered calls a good strategy for investors who are less bullish on a stock but still believe it will hold steady or grow modestly over time.
Both long calls and covered calls can be profitable strategies, but they each have different risks and rewards. It’s important to carefully consider your goals and objectives before deciding which type of call option is right for you.
How to execute a long call or a covered call
To execute a long call, you first need to choose the strike price of the option and the expiration date. Then, you purchase the call option by paying the premium. If the stock price at expiration is above the strike price, you will make a profit.
To execute a covered call, you first need to own the underlying stock. Then, you sell a call option by receiving the premium. If the stock price at expiration is below the strike price, you will make a profit.
Both long calls and covered calls are good choices if you are bullish on a stock but not expecting it to make large gains in the short-term. By selling a covered call, you can generate income from your stock position while still benefiting from potential upside. And if the stock does make large gains, you will still participate through your long call position.
Pros and cons of each
Both approaches have their own distinct advantages and disadvantages, so it’s important to understand how each one works before making any decisions.
A long call is simply an options contract that gives the investor the right to buy a certain number of shares of stock at a set price. This strategy is often used when an investor believes that a stock will rise in value in the future. The main advantage of this approach is that it provides unlimited upside potential. Even if the stock only rises a small amount, the investor will still make a profit. However, the downside of this strategy is that it can be very risky. If the stock price falls, the investor will lose money.
A covered call is another type of options trading strategy. In this case, the investor owns the underlying stock and sells call options against it. The key advantage of this approach is that it helps to hedge against downside risk. If the stock price falls, the investor will still make money from the option premium. However, if the stock price rises sharply, the investor may miss out on potential profits. ultimately, both long calls and covered calls have their own unique benefits and drawbacks. The best strategy for any given situation will depend on a variety of factors, including market conditions and personal risk tolerance.