   5: The Covered Call Strategy Strategy: Covered call Opening the Trade: Purchase 100 shares of stock in company X "Sell to open" a call option on company X Closing the Trade: 1. "Buy to close" a call option with the same strike and expiration 2. Let it expire worthless 3. You get exercised on Summary: You think a stock price will be stable or rise slightly in the near term. So you purchase 100 shares of the company's stock, and sell a call option with a strike price higher than the price you paid for your shares. If the stock is about the same price on expiration day, it expires worthless and you get to keep the premium received (which lowers your net cost). If the stock prices declines, you still get to keep the premium but you lost a bit of money on the stock itself. If it rises above your strike price, you keep the premium, but are forced to sell your shares at the strike price (regardless of the current market value). No margin is required to sell covered call options. There are two risks with this trade. One is that the price of the stock declines more than the premium received. If you receive $3 for selling a covered call, but the stock price declines by $5, you lost $2 on that trade (but you still own the stock, so its only a paper loss). The other risk is that the stock rockets to a much higher price. You are forced to sell your shares at the strike price. Some call this risk "opportunity cost" - you could have made more money by not selling the call. You still made a profit, but not as much. Oh well, "thems the breaks" as they say. Maximum Profit: The premium received plus the difference between your cost and your strike. Maximum Loss: The cost of the stock minus premium received (if the stock goes to $0). Breakeven: You lose money on this trade if the stock price is below your net cost minus premium received on expiration day.  Figure 1: Sell 1 NOV 60 Covered Call on XYZ Example:
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