From Melinda May, CPA | Featherstone
A Fredericksburg Today Partner
Selling the Upside
A covered call strategy can begin with the purchase of a stock that seems appealing.
Example: In October, Carl Wagner buys 200 shares of XYZ Corp., trading at $50, for $10,000. He instructs his adviser to sell (or “write,” in option lingo) two call options on XYZ stock at a $55 exercise price, expiring in January, which is three months away. Each call gives the option owner the right to buy 100 shares of XYZ for $55 apiece until a given date in January.
In this hypothetical example, Carl receives 90 cents per share from his sale of the call option. For his 200 shares, that’s $180. From that point on, several things can happen.
Tomorrow: Flat Market
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