Name: Covered Call

Setup: Sell (short) a call and Own or Buy (long) equal amount of shares

Bias: Neutral to Slightly Bullish (If the underlying sky rockets in price you will be forced to sell at the strike price missing out on the extra gains)


Break-Even: Underlying Price – Premium received for the sale of the call


Max Profit: Limited: To premium received; if the underlying price goes above strike price then profit increases to premium received + sale of the underlying

Max Loss: Downside risk happens only if the stock price falls to low

Margin: The short call is covered by the purchase or ownership of the stock – no margin needed

Time Decay: As time passes the call will drop in value which is what you want.  You want your short call to lose value so it expires worthless or allows you to buy it back (close it) for a lower price.

Implied Volatility: Over the life of the option you want implied volatility to decrease, thus decreasing the price of your option.  An increase in implied volatility will increase the price of your option.

Notes: Covered Calls are typically referred to as beginner plays because the option cannot take a loss so the position is relatively safe.  Selling calls on shares already owned is a good way to increase/boost profit on long-term positions.  Only establish covered calls if you are comfortable with getting assigned, if you are okay with losing the shares because they are called away.  Putting on a covered call when you are not willing to give up the shares will only bring headaches and future losses.

Featured in Trade Review: None at this time