Looking Into Covered Call Strategies for a Falling Market 5.00 / 5 (100.00%) 1 vote

Versatility is one of the most important traits that beginning traders should have. Not only will it allow them to work with a wider variety of opportunities more frequently, but it can be a good way for them to plan ahead and assess their financial situations better. Covered call strategies for a falling market are among the most useful, as they can help generate profits in flat markets. In some of the same situations, they can also provide much higher returns with a lower degree of risk than with general underlying investments. Learning how to work with these strategies can help you maximize your potential profits in just about any market.

Most covered call strategies work by pairing a longer position with a shorter call option, with both based on the same security. This is a handy combination of two positions that will rely on the higher returns and the lower volatility in order to generate a profit, rather than the underlying index. In most flat or falling markets, the receipt of covered call premiums can work so well as to reduce the effect of negative returns. In particularly well established scenarios, they can even make those returns positive. When the market rises, however, most covered call strategies will lag behind, though a degree of positivity can still be expected. While they may appear to be safe, traders should always exercise caution when they use them. The risk that accumulates over longer periods may sometimes not be enough to cover losses. Though this will typically happen when the volatility begins to climb, it is important to always be aware of the current environment before choosing your strategy.

For the most part, leveraged cover call strategies can be a very effective way to move profits from your investment, so long as two distinct conditions have been met. One of the most important is that any level of volatility that is priced with the call options should be high enough to account for the potential of significant losses during the strategy. Additionally, the returns of the covered call strategy must also be higher than what the cost of borrowed capital would be. Retail investors will have the opportunity to implement these strategies into a standard margin account, so long as the interest rate is low enough for them to successfully generate profits. For investors who are based in institutions, however, futures contracts may be the preferred choice for their covered calls, as they will be able to work with higher leverages and lower interest rates.

Depending entirely on how you plan on proceeding in the economic environment, the covered call strategies for a falling market can be a great way for you to minimize your losses and even turn a profit. But much like any other strategy, however, it is not entirely foolproof, and assessments should always be made to determine its effectiveness.