In particular, I am looking for easy ways to remember the “improving on the market” and the “target price realization” motives associated with the covered call strategy.
Covered calls and protective puts are the most basics of the basic. Understand the basics.You shouldnt have to have a trick to remember the basics.
1.) if you write a call without holding the stock, you’re writing a naked call. That means you are exposed if the stock rises.
2.) The word “covered” means you’re covering yourself so that you’re not naked (exposed). If the stock rises past the strike, the stock you hold covers you past that mark.
Just like you don’t want to write a naked put unless u like speculation.
3.) Covered calls is also an income generating strategy. If the market is running sideways, you can generate income by keep writing calls (and holding the stock). However, if market is sideways the volatility will be low so the premiums you’re collecting will be small
4.) Covered calls can also be used to get a discount on a stock. If a stock costs $30/share and the call premium is $3, you’re essentially buying the stock for $27. That’s a great discount assuming the stock doesn’t go up and your call gets exercised.
5.) If you’re in “income generating” mode, you may not want your call to hit. You may want your call to expire worthless… That way, you can keep generating income
6.) You may want to use it as a target price realization. In that case, you do want your call to get exercised… Then you move onto the next strategy.
Many many ways to view a covered call.
So basically the target price realization tells us that we want the underlying to hit a certain price?
Yes, but usually the target is going to be withing striking distance. If the stock is $50 and you have a month till expiration, you probably going to set a $5ish price target (10% jump)… maybe more if its just prior to earnings call.
If it hits the target, you made money on the premium plus the gain up to the target. If you set the target too high, you’re never hitting the target and you’re only getting a tiny premium (far out of money call is low premium).