← BeginnerLesson 22 · 5:09
Covered call (strategy)
Summary
You can work out a covered call's maximum profit, break-even and loss with plain arithmetic before you place it. You know what it means for shares to be called away and how much rise the promise can cost you. You know the premium is only a small cushion, and that you still own every share if the stock falls.
Key terms
- covered call
- Owning shares and selling someone the right to buy them from you at the strike price.
- called away
- Having your shares sold at the strike price because you were assigned on a call you sold.
- maximum profit
- The most a trade can make; for a bought put it is the strike minus the premium, times 100, because a stock can't fall below zero.
- small cushion
Check yourself
Answer each question to see why the right answer is right.
1. You own 100 shares of XYZ bought at $100 and sell one 30-day call with a strike of $105 for $158. What is your maximum profit?
2. What is the break-even for that covered call?
3. XYZ finishes at $110 and you're assigned. What is your result, and how does it compare with shares alone?
4. XYZ crashes to $70. What is your result on the shares and the call together?
5. What does it mean for your shares to be called away?
Finished the video and the quiz? .