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Practical Options Trading Strategies

Views 22KAug 9, 2023

Covered Call Strategy

You can use a covered call strategy when you expect a security or asset's price to rise slightly and steadily within a certain range.

Construction of the strategy

A covered call strategy involves two trades.

● Buy a stock

● Sell a call of the stock

The amount of shares bought is equivalent to the amount of call option asset.

Brief description

A covered call involves selling a call covered by an equivalent long stock position.

The short call's main purpose is to earn premium income, which could lower the holding cost of stock and offer downside protection.

The investors who use this strategy choose the price they want to sell the stock as the strike price of calls. Then, if the stock rises to the strike price, they can sell it at the price they had wanted.

Gain & Loss

Covered Call Strategy -1

● Breakeven

Breakeven = Stock Purchase Price – Premium Received

● Max gain

Max Gain = Strike Price – Stock Purchase Price + Premium Received

● Max loss

Max Loss = Stock Purchase Price – Premium Received


Imagine that there is a stock called TUTU on the NASDAQ, and its current stock price is $50. You expect it to rise moderately, so you use a covered call:

● Buy 100 shares of TUTU stock at $50

● Sell a $5 call with a strike of $55

Covered Call Strategy -2

(The following calculations do not include transaction costs.)

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. It is important that investors read  Characteristics and Risks of Standardized Options before engaging in any options trading strategies.

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