Covered Options Call and the Bull Call Strategies

You have to admit that some of the terminology in the financial world is interesting. There is the delta and theta for risk measurement; you can be in-the-money; or you can choose a bull call strategy. The first point that becomes crystal clear is that you need to learn the terminology before you can even begin to think of strategies.

When trading in options, there are different strategies that can be used to lower the amount of risk involved in the trading while increasing the opportunities for profits. Two of the strategies are called covered options call and bull call. Following is a brief review of these strategies that are used by investors.

Covered Call

The covered call refers to a situation where the option writer owns the underlying asset of the option contract. For example, if the option contract has stock as the underlier, the option writer could already own the stock in the contract or would buy the shares after the option contract is written. This is opposed to a naked call where the option writer does not own the underlying asset and would have to purchase it in the market if the option were exercised by a buyer.

In reality the option writer has three choices as far as asset ownership.

• Buy the asset and write the option at the same time
• Write the option on previously owned asset
• Convert a naked call into a covered call

The covered call is used when the stock price is not expected to move by much and you want to make some money on the premiums. The covered call is also used to defend against a drop in stock prices that is expected to last for a short time. The covered call is written out of the money so the most profit that can be earned is at the point where the strike price equals the market price. Beyond that point the option is in the money and the asset will be assigned and no further profits will be earned.

Bull Call Spread

The bull call spread is another options call strategy. This strategy utilizes the purchase of a call option that has a lower strike price, and at the same time, the writing of the sale of a call option that has a higher strike price. In both the purchase and sale, the same underlying asset is used and the same number of contracts is involved on both sides also.

The idea of the bull call spread is to create profit potential through the use of multiple strike prices. The bull call spread strategy also balances risk. The short call option risk is offset by the purchased call option. In other words, you have a long and a short position of the same underlying asset.

The bull call appeals to investors because of its ability to limit risk. On the other hand, the bull call will also limit profit potential because of the short call. You may have to sell when you don’t want to sell.

The covered call and the bull call are just two of the many strategies investors use to increase profit potential while managing risk. These two are presented to give you a taste of the exciting world of options trading. There are many others also to consider when investing in the options call.

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• The Covered Call Options Strategy
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• Options Call or Put in Calendar Spreads
• Calling All Call Spreads
• Getting Bullish or Bearish with a Call Put Option Strategy
• Options Strategies
• Understanding Call Options
• Options Call and Put form the Foundation of Trading
• Option Strategies – Spreads