Writing Covered Calls On CFDs Explained

There is no doubt; Writing Covered Calls is a strategy that has the potential to earn you an income on shares you already own. It has been a strategy employed by retail traders to institutional fund managers since the inception of the Options market and continues to be one of the more common options based strategies used by traders.

It's commonly believed, especially among financial market traders that the world is ruled by greed and fear. It is apparent in most traders' psychology. When to get in or out of a trade is fueled and taunted by these feelings and more likely than not, the successful traders rule these emotions out by trading a plan.

Where am I going with all of this?

The CFD market provides traders with an instrument that has 10x leverage. The Options market was designed to reduce risk. A new strategy has been kicking around the online forums recently which when combined has the potential allow investors to trade a leveraged product in combination with options to provide a premium. What is it? Writing Covered Calls on CFDs.

How does Writing Covered Calls on CFDS work? Well, much the same way as the traditional Buy/Write strategy works although in this strategy, you write the option on a parcel of CFDs rather than unleveraged stock. The strategy has benefits such as the leverage factor of CFDs which can potentially increase your returns and when you combine this with an impending dividend payment, there is a potential to get maximum upside.

The risk, however, lies with the broking platform used to execute and manage the strategy. If you used a stop loss, and your stop loss gets triggered prior to the option expiring, you could potentially be left with a naked option exposing you to significant risk. This strategy could also be used with brokers who offer guaranteed stop losses but even you have bought a guaranteed stop loss, this only protects you against significant gaps in the market, and could still potentially leave you with a naked option.

Therefore, it is imperative you watch your positions closely in case you are left with a naked option and you get exercised. This scenario is the maximum risk associated with the strategy.

While the Writing Covered Calls with CFDs strategy is excitingly new, it is important you are educated on how your broker and associated platform handles the strategy. As financial market brokers and their platforms evolve, the possibility the trader will be left with a naked option will most likely not won't exist.