Covered Call Trading- Lucrative Yet Mired with Dangers

When it comes to stock trading, almost every move that an investor makes must be well calculated. There is a fine line of difference between stock trading failure and success and that is so/mething that needs due consideration by every investor. A common advice that the stock traders face is that of taking help from professional consultants. It is true to say that keeping up with the latest trends and indications of the stock market does take much time and perseverance. The average stock trader normally lack in all these attributes, making it harder for them to predict the market in the most fruitful of fashion.

There are number of ways or more importantly “philosophies” by which the stock traders approach trading. There is covered call trading, option trading and more. More or less, all these philosophies are endowed with their own set of principles. Depending on the risk taking capacity of the investors, the portfolio is augmented and made to sync with the market trends in the long run.

There is a common issue that almost every cover call traders face one time or the other. An impressive proportion of the cover call trades reap in profits. Even such, many investor complains of being unable to outrun the major market index. This drives the investors to look into other methods and often lose out on the long term yields that cover calls could have otherwise yielded.  A major reason for this low yield performance is risk management. Though a major chunk of transactions are profitable, it’s the risk management aspect that the investors overlook. The result is the deductions which they seldom fathom. Thus, the profitable cover call trades fail to garner the magnitude of income that they probably should have garnered.

There are seeming two types of risk that an average cover calls trader faces- the large loss or a losing streak. Both the cases are unavoidable, but their impacts can be well diminished to a bare minimum. Keeping a check on the equity drawdowns is certainly possible, given one makes use of some simple parameter checks. It is possible to keep a check on large losses with stop-loss orders. One might find it tedious, but a stop-loss order on the entire cover call position can effectively work in the investor’s favor. Holding on to the stock for a long period is a waste if one does not understand the true risk-to-reward relationship that stock trading offers. A popular concept in this regard is that if there is a limitation on upside profit, there should be a viable limitation to downside loss.

Investing too much for a little return margin jeopardizes the risk-reward ratio. While in practice, one might face difficulties in attaining a 1:1 ratio on risk-reward, it is certainly not unachievable. Market corrections are major reasons for tampering of cover call portfolios. One can literally nullify the effects of market correction with the help of portfolio diversification.