Most option traders know that options trading roles include buyers and sellers. It can be understood that the buyer is a retail investor and the seller is an institution. The buyer and seller are counterparties to each other. Therefore, opening a covered option position is a professional investment by the option seller. The strategy used by readers, how to open a covered position with popular science options below? This article comes from: Caishun Options
Opening a covered option position means purchasing the underlying security and selling the corresponding option call contract at the same time. Covered position opening is one of the common strategies in options trading, but many investors have not used this strategy. I have compiled the method of opening a covered position, hoping it will be helpful to everyone.
1. What is option covered opening?
A covered call means that an investor sells a corresponding number of call option contracts on the basis of holding a sufficient amount of the underlying securities.
Investors perform a "lock-up" operation on the underlying objects they hold, and sell call options one-to-one based on the number of locked objects. That is to say, after investors construct a covered opening strategy, the obligation to deliver stocks in the future can be precisely through the stocks held in their hands. Some stocks will be fulfilled. Therefore, no deposit is required to open a position.
Opening a covered option position is a relatively conservative investment strategy. When the stock price falls, the premium received by the investor makes up for the spot loss to a certain extent.
When stock prices rise, investors can still receive royalties, but their returns will be limited.
It can be seen from the profit and loss chart that when the stock price rises beyond the exercise price, the covered call options sold at the opening will be exercised, and investors cannot continue to obtain benefits from the rising stock price. At this time, the combined strategy profit will reach the maximum and remain unchanged.
2. The steps for opening a covered option position are as follows:
1. Submit a covered locking instruction for the underlying contract, and submit the underlying contract in its securities account as a security for covered opening.
2. When the number of securities used for locking coverage is insufficient, the covered position opening instruction will be invalid.
3. By holding futures and buying put options, investors can lock in the risk of a bearish market, and the rising market will bring unlimited returns.
4. When exercising the option, investors can obtain the delivery value of the contract according to the delivery ratio specified in the contract.
5. After the contract is closed, the corresponding security will remain locked and traders need to unlock it themselves or wait for it to be automatically unlocked at the end of the day.
3. How to open a covered option position?
Step 1: Pick the right stocks
When opening options covered positions, investors need to pay attention to choosing stocks with moderate price fluctuations. If the stock price fluctuates more, although the option contract price will be higher, the risk will also increase accordingly. Therefore, investors first need to choose the right stocks.
Step 2: Select an option contract whose underlying asset price is close to or lower than the option exercise price.
When opening a covered option position, if an investor chooses a deeply in-the-money option contract, the possibility of the contract being exercised at expiration is high, so the covered opening operation is meaningless. Conversely, choosing a contract that is deeply out-of-the-money will reduce the option's premium return. Therefore, it is most appropriate to choose an option contract with one or two levels of at-the-money or out-of-the-money options.
Step 3: Prepare to exercise your rights
In an options covered opening operation, investors usually sell call option contracts. Therefore, on the expiration date of the option, they need to fulfill their obligation to sell. Therefore, if the market trend of options trading does not match expectations, investors need to be prepared for the possibility that the options may be exercised. Although the profits may not be as high, there is still some gain to be had.
Opening a covered position is a required simulation item for the Level 3 option exam. If you don’t know how to operate it in detail, you can ask me on the homepage.