From Melinda May, CPA | Featherstone

Up Market

In another scenario, XYZ shares break above the $55 exercise price, and the call options are exercised. As this is a “covered” call, Carl can fulfill his obligation under the option contract by delivering the 200 shares of XYZ that he owns.

Here, Carl gets a 10% return ($5 profit after buying at $50 per share), plus the 1.8% return from selling the call, and perhaps the quarterly dividend, as well. Not a bad profit for holding this stock for three months.

Of course, XYZ might zoom past $55 to $60 or $65, and Carl would miss out on a greater profit after relinquishing his shares. That’s a key disadvantage to this strategy.

Tomorrow: Down Market


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