Covered Call

Long the stock, short a call. The term "buy-write" also is used for this strategy. This has essentially the same payoff as a short put

Covered Call = Long Stock + Short Call

This strategy is best implemented in a bullish to neutral market where a slow rise in the market price of the underlying stock is anticipated. This technique allows traders to handle moderate price declines because the call premium reduces the position's breakeven. Since the profit on a covered call is limited to the premium received, the premium needs to be high enough to balance out the trade's risk. This is good for stock that you like to keep it long term and also get some extra propfit (option premium).

EXAMPLE:

If you believe that Microsoft will be up slowly, you can either buy MSFT stock and sell it's call option. Let's see the example of buying MSFT 100 share and sell

1 contracts (100 share) MSFT October 32.5 call.

1. Buy 100 share MSFT

MSFT current price - $ 30

Commission - $ 10

Total cost - $ 3010 (30*100+10)

2. Sell 1 contracts of Oct. MSFT 35 Call

Premium - $ 1.00/contract * 1 (1.00*100) = $ 100

Commission - $ 20

Total cost - $ 80 (100-20)

Max risk - $ 2930 (3010-80)

Breakeven - $ 29.30 (30.1-.8)

Max profit - unlimited to the upside over breakeven

If CSCO price climb up to 34

Option Profit - 80

Stock Profit - 390 {(34-30.10)*100}

Total - 470

After the call option expire worthless (MSFT price less than 35), you can sell a call option over and over again. Or your option is assigned (MSFT price above 35),

you sell your stock to call option buyer. Now, you can buy the same stock or find other target(stock) and repeat this strategy.