Covered calls can perform several functions for the „seller“ known as the writer of the option, and also the buyer or holder of the option contract. Selling a contract allows a way to derive income from an underlying equity, that being a marketable stock or commodity. Another function is that it allows a seller to set his own price. The buyer is making the opposite bet on the future price of the stock, which in a covered call transaction would be a anticipated decrease in the stock price.

Once a better understanding of how and why call options can offer an alternative method of profiting from a stock, then the sooner and safer one can benefit from this knowledge. Not only are there gains to be made, but risk can be managed through means of hedging against or minimizing devaluation of the under-lying equity.

The origin and history of this type of trading began with commodities. Consumers of such staples as seed, rice, wheat, corn, and cattle wished to have a way to lock in a price at which to buy the commodity out into the future at. This would protect them against sudden and unexpected increase in prices and assure them of a guaranteed supply.

Conversely, the seller of the very same commodities hoped to ensure that the fruit of his labor retained it’s value long enough to sell off his harvest and thus avoid falling prices. This simple dynamic required a buyer and seller to agree upon a contract where each hoped his best interest’s would be well served.

The need to attain some type of stability gave rise to the options market as we know it today. Sellers had the same need to somehow buy a type of insurance policy, just as the buyers of the commodities needed to buy some type of insurance.The producers and sellers of the commodities would sell options to lock in customers, and lock in a prices. Selling your planned harvest in advance, backed by legal contracts reduced risk.

Most options are never exercised in the physical sense where the under-lying stock actually changes hands. It most often is strictly a paper transaction. It is impractical to carry the transaction to it end, so most often it is simply traded out from or covered by an opposing position. When a covered call option expires un-exercised, then there is an unhappy buyer and a very happy seller.

Contracts are standardized in lots of 100 shares each, accordingly 5 contracts represents 500 shares. Rights and obligations are in essence what is being bought or sold. This is what must be understood to appreciate the true nature and what actually is being conveyed in such a transaction.

Any writer or seller of covered calls is motivated by realizing a gain through the un-exercised expiration of the contract. This is done by virtue of making a profit on a stock he may have owned for an extended period of time.

The other way it can be of benefit is to make the actual cost of purchasing a stock lower. This is done by selling an option and using the premium’s income to book a lower cost per share than the actual purchase price. These two features allow an investor an addition vehicle with which to realize a gain other than dividends or rise in the price of the under-lying equity.

Learning the best option trading strategies will help you be a successful market trader. Covered calls make it possible to protect your investment.