← Strategy LabLesson 5 · 3:59
Covered call
Summary
Use a covered call when you own the shares, expect a gentle rise, and are happy to sell at the strike in return for a payment now. You own 100 shares at $100 and sell the $105 call for $1.58 a share, so the most you can make is $658, and if XYZ went to zero you would lose $9,842. You break even at $98.42.
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.
- exercise
- Using the right in an option, so a call buys, or a put sells, the shares at the strike price.
- cushion
- The money in your account not yet held as margin, which losses eat into.
- break-even
- The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.
Check yourself
Answer each question to see why the right answer is right.
1. You own 100 XYZ at $100 and sell the $105 call for $1.58 a share. What is the most you can make?
2. Where does this covered call break even?
3. XYZ ends at $110 on the last day. What is your result?
4. XYZ ends at $90 on the last day. What is your result?
5. In a covered call, what does the sold $105 call do?
Finished the video and the quiz? .