Covered call options
A covered call sells a call against 100 shares you own: premium now, upside capped at the strike, the stock’s downside kept. Max profit, breakeven and when shares get called away.
Selling the call you own
A covered call is 100 shares you own plus one call you sold against them. Riley sells the 30-day 105 call for $2.70 and keeps $270 whatever happens. If RocketCo closes above $105 at expiration, the shares are called away at $105.
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Covered means the shares are already in the account, so assignment costs nothing extra: the broker delivers them. Selling the call without the shares is the naked short call from chapter 5, with no ceiling on the loss.
The cap
The call you sold takes every dollar above the strike. The most a covered call can make is the climb to the strike plus the premium. If RocketCo rips to $115, the shares alone would have made $1,500. The covered call stops at $770.
The cushion is thin
The premium only softens a fall. Riley’s breakeven is $100 − $2.70 = $97.30. Below that, the shares lose almost dollar for dollar, as if the call had never been sold. A covered call is still a stock position with most of its downside.
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Delta says the same thing. 100 shares are 100 deltas; the short 105 call, at about 0.37, takes 37 away. The position moves like about 63 shares: a bit less on the way up, and nearly as much on the way down.
Two percent a month on a screenshot is not 24% a year. It is 2% in the months the stock behaves, and a stock loss in the months it does not.
Key terms
- Covered call
- Own 100 shares and sell one call against them. Premium now, in exchange for capping the upside at the strike.
- Called away
- Shares delivered at the strike because the short call was exercised.
- Upside cap
- The most a covered call can make: the climb to the strike plus the premium.
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