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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 – 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

















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