Covered call strategy: Enhances income from stocks
Covered call strategy: Enhances income from stocks
Covered call writing is one of the strategies to enhance potential income from stocks. With this strategy, fund managers broaden the income source for the funds. The idea is like this: by holding the stocks and selling the call options on the same assets, potential call premium can be received as an additional income.
How does a call option work?
Call option outcomes
Three scenarios of the covered call option strategy
Source: HSBC Global Asset Management. The above examples are based on assumption of holding all other factors constant actual situation may differ from the above cases. For illustrative purposes only and not guaranteed in any way. Writing covered call options gives the option purchasers the right, but not the obligation, to purchase the referenced equities in the future at a pre-determined price (“strike price”). Writing covered call options limits the potential capital growth of the referenced equities to the strike price thereby limiting the overall potential return. Beyond the collected option premium, writing covered call options does not limit downside risk and investor will remain fully exposed to the risk that the referenced equities substantially fall in value.
Pros and cons of a covered call strategy
Source: HSBC Global Asset Management. For illustrative purposes only and not guaranteed in any way.
Disclaimer
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