How To Sell A Covered Call on An Existing Stock Position
A covered call is a stock/option combination created when a Call(s) is sold equivalent to the amount of stock owned (or purchased). The stock owned covers the option(s) sold. Here are the steps to buy a covered call on an existing stock position.
1. Right click on the position line on the chart to open the drop down menu
2. Select Sell to open {1} Covered Call
The number of calls listed in the menu will equate to the nearest 100 share value below the amount owned. For example, if 250 shares are owned, the number will be 2 Covered Calls, which would equal 200 shares. The other 50 shares would not be involved in the combined position.
This places a Sell ticket on the chart for the correct number of call contracts.
3. Select Expiration Date
Change the expiration date either to closer or further dates using the arrows
Alternately, select a specific expiration date from the drop down menu
4. View available strike prices with the limit price line
Click and drag the Limit line between the available strike prices for the selected expiration date. These are represented by the hash marks at the left of the P&L Zones. Simply stop at the desired strike for the contract.
5. Select the order type desired for the contract
Either leave the order set on Limit, or select a different order type from the drop down menu.
6. Set a Limit Price (optional)
The Limit slider shows the spread between the natural (in this case, the bid) and the far (in this case, the ask). To set a price within the spread at which to place your order, click at any point on the slider. The limit value is seen in the price field next to the "Lmt" order type.
7. Use a Step to Limit order (optional)
Another way to take advantage of the spread is the Step to Limit order. Choose the Step to Limit order from the drop down menu.
Set the beginning of the slider at the limit price desired for the initial order. This will be the limit price at which the order will be entered.
You can also select any point within the spread to have the order stop modifying.
Over the predetermined time period the limit price will be automatically modified down from the initial entry price toward the Natural (or selected) price. The step to limit order will attempt to secure a preferable fill price in this process. Modification stops if no preferable fill is received and the limit price reaches the Natural.
8. Set the duration (time-in-force) for the order
9. Submit the order
Click Sell to open call
Click Place Order to confirm and submit
10. View The Order
The current stock position and the short call will now appear on the chart. The P&L zones show the option generates income (the premium). But through the expiration date, the upside gains are limited to the strike price minus the premium plus any gain in the equity price. The position is subject to substantial loss (e.g. if the stock goes to zero). However the loss is offset somewhat by the premium received for the short call. Should the call expire without being exercised, the stock position and the option premium are both retained.
The trading tools work on either a LIVE brokerage account or a PAPER (simulated) trading account. Live market trading requires an account with TC2000 Brokerage (www.TC2000Brokerage.com).