Covered Calls
A covered call is a bullish strategy with low risk and limited reward.
How it works: The idea is to sell a call option on a stock that you already own. Because you own
the stock, you are covered and safe in this position. To use the covered call strategy, you must
A) own (or are ready to buy) stock in a company and B) sell the call option at the next strike
price up, in the current or next month out.
Example: You purchase a stock for $20, then sell the call option at the next strike price up, in
this case $22.50. At that time you receive $1 in premium for selling the call. The stock has
reached $22.50 at the time of options expiration, so you are called out, earning you $2.50 for
the stock sale. Your net profit on the trade is $3.50 per share or $350 per contract.
The payoff: You keep the premium, plus the profit in the stock price. If you don't get called out,
sell a call again for the next month.
The drawback: You have limited profitability. It doesn't matter if your stock doubles in price;
you must sell it at the agreed-upon strike price. If you think the stock is really going to soar,
you can buy the calls back before expiration and keep the stock.
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