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Originally Posted by lewdog
I first want to thank you for your always very diligent responses and bascially teaching me about options trading from your posts here and in PM's. It's truly been helpful.
So I do understand what a covered call is and let's use this example for my final questions. The downside to writing covered calls is when a stock blows past your strike point. Yes, you get profits from the gains up to your strike point + the premium, but you missed out if that stock price goes through the roof on future gains. Fair enough, and likely worth the risk if you are planning to sell for profits in the near future anyway.
So in your example, if Stock X never gets to the $32 strike point (option not exercised), do I keep the premium ($245) and the option just expires (I keep my 100 shares)? What's to stop a person from just trying to make income off options that expire this way? Say placing this $32 strike point in a covered call, but actually speculating that the stock takes a dip. I collect the premium when this option expires ($245) and then also decide to buy more stock on the dip?
Am I thinking correctly here?
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You nailed it! You are correct
If a stock goes nowhere and you keep writing calls that expire, you keep collecting the premium until the option expires. You will only be allowed to write calls on covered positions. Most brokerage firms don't allow naked call writing for individual investors.