Covered Call

• Involves selling call options of stocks already owned or simultaneously bought
• Motivation
• Earning a return from the underlying that is already owned
• Lowering the cost of acquisition of the underlying asset
• Expectation`
• Moderate rise in the price of the underlying
• Profit Potential
• Maximum Profits when the options are exercised by the buyer
• Premium received + Strike Price â€“ Spot Price
• If the options are not exercised the trader gets to keep the premium, thus lowering the cost of acquiring
• the asset
• More conservative than buying the stock only

If MyCompany (MC) trades at $33 and$35 calls are priced at $1, then an investor can purchase 100 shares of MC for$3300 and sell one (100-share) call option for $100, for a net cost of only$3200. The $100 premium received for the call will cover a$1 decline in stock price. The break-even point of the transaction is $32/share. Upside potential is limited to$300, but this amounts to a return of almost 10%. (If the stock price rises to $35 or more, the call option holder will exercise his option and the investor's profit will be$35-$32 =$3). If the stock price at expiry is below $35 but above$32, the call option will be allowed to expire, but the investor can still profit by selling his shares. Only if the price is below $32/share will the investor experience a loss.  Stock Price at Expiration Net Profit / Loss Comparison to Simple Stock Purchase$30 (200) (300) $32 0 (100)$33 100 0 $35 300 200$37 300 400