Profiting with Covered Call Options
A covered call option strategy occurs when an investor will write, or sell, a call option while simultaneously owning an equal number of shares of the underlying stock. Typically, the stock shares will be held in the same brokerage account where the investor has written the call option. Therefore, the shares of stock essentially “cover” the obligation by the investor should they be called to sell those shares via the obligation from the written call.
This strategy of “covering” the investor's option obligation is usually used when the investor feels that the market value of the underlying stock shares will not make any drastic movements either upwards or downwards throughout the time of the option contract.
One way for an investor to profit with this strategy is to keep the premium received from writing the call option. In addition, because the investor also owns the underlying stock, they will receive the stock ownership benefits such as the company's dividend payments and voting rights associated with the stock.
Because this technique does offer some protection from a downward price movement in the underlying stock, it is considered to be a somewhat conservative strategy due to the decrease in risk of ownership of that stock.
The investor can profit at the time of the options expiration whether the underlying stock has been called or not. For example, if the underlying stock has been assigned, the investor will still have received the income from the written call premium. In this case, they could also receive the difference – if any – between the underlying stock's purchase price and the strike price.
If the underlying stock has not been assigned by the time the option expires, the investor can still profit. Again, they will have received the premium from writing the call option. In addition, they can also keep the gains – if any – in the shares of the underlying stock.
The investor's maximum profit can occur should the underlying stock share price be at or above the strike price of the call option, either at the date of the options expiration or if the stock is exercised prior to the expiration of the option contract.
If for some reason the investor changes his or her mind about the underlying stock and feels that the price may make a significant up or down movement prior to the options expiration date, then the investor may close out the purchase of the call option. This would accomplish relieving the investor of their obligation to sell the underlying stock shares at the strike price of the written call.
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