Option Draft

Covered Call

own the stock. sell the covered call (sell a call option) above the strike (current) price.

if stock below the strike - keep the premium above the strike - option exercise, sell 100 shares stock falls - keep the premium

Example

• Owns: 100 shares of XYZ at $50/share
• Sells Call: Strike price $55\ast \ast ,expiringin1month,collects\ast \ast$2 premium per share
• Total Premium Earned: $2\times 100=\ast \ast$200**

Possible Outcomes at Expiration:

1. Stock remains at or below $55:

   • Call expires worthless
   • Investor keeps the $200 premium
   • Still owns 100 shares of XYZ

2. Stock rises above $55(e.g.,$58):

   • Investor must sell shares at $55
   • Profit = ($55-$50) × 100 + $200=\ast \ast$700 total profit**
   • Loses potential gains beyond $55

3. Stock falls (e.g., $45):

   • Investor loses $500 on stock value
   • Premium offsets some loss → Net loss = $500-$200 = $300 loss reward: Limited to the premium received + stock up value

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Cash secured (Sells a put option)

Sells a put option at a chosen strike price. Set Aside Cash

Stock stays above strike : Option Expire, keep the premium. Falls below the strike : Must buy

• When you want to buy a stock at a lower price
• When you expect the stock to stay above or near the strike price
• When you want to generate income while waiting to buy the stock

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