Chapter 10Covered Calls

The basics of investing were covered in Part I, and the reader should now understand where stocks trade, what indicators to watch, and how to place orders. Options basics, including simple strategies of long puts and long calls, were covered in Part II. Part III focuses on a number of other options positions and strategies that I use and that I have taught to investors over the years.

One of the more basic ones—the covered call—is explained in this chapter. Like the protective put, covered in Chapter 7, it is viewed as an entry-level strategy that is a natural extension of stock investing that many investors are already familiar with. There are important differences between long stock and covered calls, however, such as the possibility of being assigned on the call options, the potential profits, and how the breakeven is calculated.

Although it is likely review for many options traders, the covered call is a good starting point for our discussion of various option strategies. Just as an experienced ski instructor doesn't send a student on a black diamond run on day one, an investor with no options trading experience should consider starting with the simplest of strategies first and then moving on to more complex ideas like butterflies, calendar spreads, and others discussed in the last few chapters of this book.

The Covered Call

An investor can learn a lot about options by understanding the covered call, because many important concepts, such as implied ...

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