Investment Basics

In call option selling, covered means safety. In this article we are going to look at a covered call example. Suppose you buy 100 shares in the Old Times company at $55/share. This will cost you $5500. The same day you write a call option against it at a strike price of $60 (The strike price has to be higher than what you paid per share in order to make a profit.) Let's say you charge $2 per share for the option. That means you will get a $200 premium if somebody buys the option.

If the stock goes up, the buyer of your call option will be inclined to exercise his option. He will do that when the share price significantly exceeds the strike price. If he exercises his option when the stock is at, say $63 a share, you will be compelled to sell. You will cash in $6300. Together with the $200 premium, that makes $6500. If you subtract the $5500 initial stock price, you are left with a profit of $1000 (minus commissions). With the $6500 you can buy more stock, if you wish, or invest it in some other way.

If the stock falls, the buyer of the call option is not going to exercise it and the option will expire worthless. In that case you simply cashed in the $200 and, at the option expiration date, you can merrily sell another call against the same stock.

A simple covered call definition would be: a strategy to sell call options against an underlying asset that you already own.

The covered call example here should show you how you can get more. You should see this covered call definition function through the Born to Sell site so you can know what you can earn through the use of options.