E. Option Trading Strategies
4. Writing Call Options Strategies
- a. Writing covered calls
- Investor owns 100 shares of IBM ($50) and writes a call at $55 to earn a greater return than the stock alone. Investor earns D = $1.00 plus $5.00 on the call. Return is $6.00 plus any capital gains.
- Disadvantage: if price goes above $55, the upside is limited to $6.00.
- Note: Covered call also provides limited protection to writer against price decline. Price can decline to $45 ($50-Premium) before writer experiences paper loss.