Covered Calls

An example of covered call writing looks something like this. We buy 1000 shares of XYZ Corp at 20 bucks a share. Twenty thousand dollars invested. Now, a call write, means that a client enters into an agreement with an options trader in which over the next five months, this is a five month example, the client may not sell his shares. If in that five month time, the option trader who bought the option decides he wants to take the stock away from you at twenty two. He can. You will be forced to sell the shares at twenty two. For that privilege, the client receives a premium. In this case ninety two cents per share, or nine hundred and twenty dollars. That is given upfront, and you are guaranteed to keep it. Whether the stock goes up or down. If you add that 920 to the dividend of $75 you get $995 or 4.98% for five months. This is made whether the stock market goes up or down. This is a guaranteed yield over the five months. Should the stock climb excessively above 22 close to 23, 24, 25, you can be assured you will receive a knock on your door. The option trader will buy the shares away from you at 22. In this case, you will make $2 a share more. Thus, you will make $2995 over the five months, which is 14.98%. This is not an annualized rate of return, that's the rate of return you're going to make if the stock goes up. The downside to this example is this. That stock can go to a $100 a share. You would be forced to sell it at 22. We believe that that extra stream of income over time. More than makes up for any money we leave on the table.