A covered call strategy consists of owning stock and selling at-the-money or out-of-the-money calls based on the shares owned. Selling a covered call means you can benefit from time decay and/or volatility contraction while you wait for the next move in the stock. To illustrate basic principles, this chapter assumes that a covered call is executed when there is a one-to-one ratio of options sold relative to the number of shares owned. This chapter provides an overview and comprehensive example and then describes how a covered call is equivalent to an uncovered put, how to choose the appropriate option to sell, how to repeat the process (rolling), and how to understand risks.
A covered call is a strategy in which you own stock and then sell at-the-money or out-of-the-money calls in proportion to the shares owned. For example, if you own 1,000 shares of XYZ stock, you can write up to 10 call options in a covered call transaction. A buy-write (also called a covered call write) strategy is a version of a covered-call strategy in which the stock purchase and option sale occur as part of the same transaction. Your trading platform may include the ability to execute a buy-right order; for example, if a stock is trading at $100 a share and a call is selling at $2 ($200), you can enter a single order to execute the transaction at $98 or better. As a result of entering a limit order in this manner, you will not be executed on only one side of the transaction ...