Let me see if I could explain covered call clearly

A covered call is about selling a call option against a long stock position. This strategy can generate income while limiting potential losses.

Here is an example of a covered call trade on stock XYZ, which is currently trading at $100 per share:

1. Buy 100 shares of stock XYZ for $10,000

2. Sell a call option with a strike price of $105 for $2.00

The premium received from selling the call option represents the maximum profit potential for this trade, which in this case is $200 ($2.00 x 100 shares). If the price of stock XYZ stays below $105 by the expiration date of the call option, the trader keeps the premium and can sell another call option if desired. If the price of stock XYZ rises above $105, the trader's potential profit is limited, but they are still holding onto the long stock position.

There are several potential outcomes for this covered call trade:

1. If stock XYZ stays below $105 at expiration, the trader will keep the premium received from selling the call option and can sell another call option if desired.

2. If stock XYZ rises above $105 at expiration, the trader's potential profit is limited to the strike price of the call option plus the premium received. In this case, the trader would receive $10,500 ($105 x 100 shares) plus the $200 premium received, for a total of $10,700. However, if XYZ's price continues to rise beyond $107 (105 + 2), the trader may miss out on additional profits.

3. If stock XYZ falls in price, the trader's loss will be limited by the premium received from selling the call option. For example, if stock XYZ falls to $95 at expiration, the trader would lose $500 on the stock position but gain $200 from the call option premium, resulting in a net loss of $300.

That's it! Hope it's clear enough! I am still a beginner in options trading. Looking forward to reading your thoughts.