Important notice
The information on this web site is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Trading in stocks and options involves risk. You can lose money. You should always seek professional advice from your stock broker. We are not stockbrokers and do not make recommendations to buy or sell any stock or option. We provide educational information for your evaluation.

Return to option strategies

Covered Call writing is one of the most popular strategies.

A covered call writer guaranties the call buyer the XYZ stock at the agreed strike price. There are two reasons to write a covered call;

1 To receive extra premium from the XYZ stock.

2 To gain some protection (limited to the amount of the premium) from a decline in the XYZ stock price.

Covered call writing is considered to be a more conservative strategy than to simply owning the XYZ stock or buying a call options.

Strategy: believing that XYZ stock is bullish and in a up trend we purchase XYZ stock for 48.00. Based on the pattern, we believe that XYZ stock will reach 58.00.

The next step is for us write (sell) an option with a strike price of 55.00.

The strike price month expiration time, should be  majored by the time of the completion of the pattern) at 3.00, if we purchased 500 shares of XYZ stock we would write 5 contracts (Each contract is equal to 100 shares) and receive in to our trading account 1500.00 of premium.

XYZ stock does what it suppose to do and buy expiration date is trading at 56.00-58.00.

• We get called out on the XYZ stock for 55.00.
• We receive 55.00 per share of XYZ stock we paid 48.00 a 7.00 profit x 500 shares = 3500.00
• We keep the 3.00 for writing the covered calls a total of 1500.00
• A total profit of 3500.00 + 1500.00 = 5000.00
• Note; We are not considering margin cost and brokers fees.

Risk, XYZ stock does not do what it suppose to of done and loses value, by expiration date is trading at 45.00

• We keep the premium for writing the covered calls the total of 1500.00.
• We still owen the XYZ stock that we bought at 48.00 - 3.00 = 45.00
• We can sell the XYZ stock at 45.00 and lose the expense of the margin and brokers fees.
• If we still like the XYZ stock and believe that it will go up we can do the strategy one more time.