We will explore the covered call strategy that can profit in your stock is up, down or flat. Covered calls have a long stock position and a short call option position. The stock profits as the stock moves up in price. The short call position profits as the stock moves down in price. The short position provides downside protection if the underlying stock declines in price. Covered calls are also known as buy writes.
The Buy Write Analysis below displays the profit potential for an actual Covered Call trade that we recently initiated for the Emerging Market ETF. We purchased the EDC ETF and sold to open the EDC 126 Strike call. This created a covered call.
This analysis reveals the profit potential for this covered call trade assuming various price changes for the Emerging Market ETF at option expiration from a 10% increase in price to a 10% decrease in price. The analysis reveals:
EDC Up at all at Expiration = 15.4% Return
EDC Flat at Expiration = 15.4% Return
EDC Down 10% at Expiration = 4.0% Return
Profiting on your stock/ETF trade when your stock/ETF is up, down or flat will result in a higher percentage of winning trades and can give you the confidence you need to become a successful trader. Learn how to set up covered call trades that can profit in up or down markets.