An Idealized Trade
Let’s first examine how an idealized covered call trade might work to perfection.
You buy 100 shares of XYZ at $30 per share for a total investment of $3,000. Over the next seven months, this stock averages a monthly rise of 9.5 percent as it moves up to $50 per share, for a great $2,000 profit. To enhance this profit in each month along the way, you sell 1 call contract (1 contract = 100 shares) on XYZ at a strike price that is about 10 percent to 15 percent above the stock price. Suppose that your selling price for each covered call is $1.20 per share, which brings in an additional $120 per month. Assuming that the price of XYZ is never above the strike price of the current month option as it expires, you will be able to ...
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