By: Steve Smith
Recent market volatility has both put traders on edge and pumped up the volatility in options.
Those two usually go hand in hand and they create a great opportunity for longer term investors with a cooler demeanor to capitalize on the current dislocation.
One of the best, and most popular approaches, especially among investors that don’t consider themselves ‘option traders,’ is the covered call strategy.
The other day I wrote how people are piling into funds that employ option premium selling strategies, particularly covered calls or buy-writes.
I figure it’s a good time to drill down into exactly what these strategies entail.
It’s a way for owners, especially for buy and hold types, to generate income from the stocks they own while also providing a bit of a hedge for their portfolio.
When a trader writes a covered call, usually they are looking to sell theta decay, which is a component of premium. Selling premium can mean many things, but we mean selling extrinsic value.
Extrinsic value is…
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