Covered calls are a popular options trading strategy that involves holding a long position in a stock and selling call options against that position. The goal of a covered call is to generate income from the premiums received from selling the call options while also protecting the downside risk of the stock. In this article, we will discuss how to do covered calls on Robinhood.
Steps on How to do Covered Calls on Robinhood
Step 1: Open a Robinhood Account
To do covered calls on Robinhood, the first step is to open an account with the platform. Robinhood is a commission-free trading platform that allows users to buy and sell stocks, options, and cryptocurrencies. You can sign up for an account on the Robinhood website or download the mobile app from the App Store or Google Play.
Step 2: Buy the Stock
Once you have an account, you need to buy the stock you want to use for the covered call. You can search for the stock on the Robinhood app or website and place a buy order. It is important to note that to do a covered call, you must own at least 100 shares of the stock.
Step 3: Sell the Call Option
After buying the stock, the next step is to sell a call option against the position. You can do this by selecting the stock on the Robinhood app or website and choosing the option to sell a call. You will then need to choose the strike price and expiration date for the option.
The strike price is the price at which the option can be exercised, and the expiration date is the date by which the option must be exercised. It is important to choose a strike price and expiration date that align with your trading goals and risk tolerance.
Step 4: Manage the Trade
After selling the call option, you need to monitor the trade to manage your risk and potential profits. If the stock price rises above the strike price of the option, the option may be exercised, and you may be forced to sell your shares at the strike price. This can limit your potential profits if the stock continues to rise.
To manage this risk, you can choose to buy back the option or roll the option to a later expiration date and higher strike price. Rolling the option involves closing the current option and opening a new option at a later expiration date and higher strike price. This allows you to continue generating income from the premiums received while also protecting your downside risk.