John Jagerson

5 Things You Need to Know About Covered Calls

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This article is brought to you by LearningMarkets.com.

There are a few things you to keep in mind as you become a covered call investor.

1. Be careful about commissions.

If you buy the stock and sell the call at the same time, this trade is called a buy-write. Call your broker and talk to them about this order type and any restrictions or additional costs they may have. (Get The Truth Behind Broker Commissions.)

2. Make sure you have permission to sell covered calls in your account.

Covered calls require the lowest level of options trading approval from your broker. Call and make sure this is something you have. (Learn 7 Reasons You Need a Broker Who Specializes in Options.)

3. You can exit a covered call at anytime.

If you want to get out, all you need to do is buy the call back at the current ask price and sell the stock.

4. Many traders will choose to exit a call that has moved in the money that could be exercised at expiration to avoid having to sell the stock they own in their account.

There is nothing wrong with this; it is really up to you. It can avoid the hassle and transaction costs of clearing the underlying stock, especially since you'll often write calls on the same stock over and over.

5. Beware of big promises from advisory services.

There are a lot of options writing and covered call advisory services promising huge returns. These are seldom true, and may come with big fees and lots of account volatility.

If you see promises or examples of huge monthly returns from covered calls, be careful; you are probably not getting the whole story.

To get started trading covered calls, see:

• 4 Benefits of Selling Options
  
• The Advantages of Covered Calls
  
• Why Trade Covered Calls?

This article originally appeared on the Learning Markets Web site.