What is a covered call?


Video Transcription

Okay, today we're answering the question what a covered call is? This is one of the first strategies that most investors are exposed to when they're trading options. I like this strategy. It's a great way to target a consistent income on stocks that you already own. It's a short-term way to look at a potential down move on a stock and to at least make a little bit of profit off of that.

Let me give you an example, let's say that you have XYZ stock trading at 100. You buy 100 shares of the stock, here's a $10,000 investment.

Now let's assume that this stock has a 20% return a year, you'd make a $2,000 return. Which is pretty good. Now, look at if you were to sell call options every month on this stock. That's all you're doing, you're selling you a call option, you get paid for that, you could do this each month on stock. Basically what you could do is sell one call option contract with 30 days to expire, roughly. Get paid, let's just say a $1.50 a share. That's $150 a month that you can target on certain stocks, times that by 12, that's another $1800 worth of profit that people can target when they're doing covered calls. So add the two together, you have the $2,000 return on the stock, you have the $1800 return on your call options, and now your profit is nearly doubled, and you're seeing yourself with $3800 in profit at the end of the year.