Covered Call Option Trading Risks & Disadvantages: Options, Futures, Derivatives & Commodity Trading

Covered Call Option Trading Risks & Disadvantages

Details about Risks and Disadvantages of Covered Call Option Trading
Continuning further from our previous articles on Covered Call Option: Example with Payoff Charts Explained and Profit & Loss Calculations for Covered Call Option Trading. In this article, we cover the Details about the Risks, Disadvantages, Advantages and Benefits of Covered Call Option Trading Covered Call Option Payoff Function
What are the risks in Covered Call Option Trading?

As the name suggests, this is a covered call position, hence it is comparatively less risky than the naked call option position. However, there are certain problems that the options traders should keep in mind before trading Covered Call Option.

1) You must account for the brokerage and commissions for options trading

2) You need to get into a combination - that consists of 2 positions. It will cost you high on brokerage and charges

3) You must understand that even though theoretically, you can configure the Covered Call Option position on paper, things will be different when you really try to create that in the open market. It is possible that $25 stock price might shoot up to $26 and the premium you receive from call option shorting might be low.

4) Remember that your profit and loss depends completely on your buy price of stock and sell price of short call option. A slight movement here or there will ruin your calculations.

5) The stock position does not have any expiry date, but the call option position does. You must clearly decide what you will do with the stock position on the expiry date of the call option

Benefits of Covered Call Option Trading

- This Covered Call Option position should be taken when you are short term bullish in the stock or the market you are trading.

- Being a limited loss limited profit position, this provides a good hedged position for options traders

- It does not take much large amounts to get into Covered Call Option position
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