Unit 2 · Level 2 · Covered calls & cash-secured puts
The covered call
You own 100 shares at €40. You sell one €44 call expiring next month and collect €1 per share. It's like renting out a flat you own. If the stock stays below €44, you keep the shares and the rent. If it flies past €44, your shares get 'called away' at €44: the tenant buys your flat at the pre-agreed price, however hot the market got. The premium is real income; the capped upside is its real cost.
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What you get asked
You own shares at €40, sell the €44 call for €1, and the stock rallies to €50. Your shares are called away at €44. What is your total gain per share, in €?
€4 of share gain (€40 → €44) plus €1 of premium = €5. The €6 above €44? That belongs to the call buyer now. You sold it to them.
What is the honest cost of writing a covered call?
Nothing about the trade is free: the premium is the market's fair price for the upside you handed over. Your downside in the shares stays almost fully yours.
Match the scenario to the covered-call outcome
Covered calls shine in flat-to-slightly-up markets. They don't protect you in crashes and they lag badly in melt-ups. Know which market you're in.
A covered call trades away your ___ in exchange for premium today.
You still hold nearly all the downside of the shares. The premium is a thin cushion, not a hedge. What you sold is the right tail.
Compared with simply holding the shares, when does a covered call hurt the most?
A takeover rumour sends your stock from €40 to €70, and you still sell at €44. Missing a monster rally on shares you owned is the covered call's signature pain. 🐜
The rest of this unit
Renting out shares and getting paid to bid: income strategies, priced honestly.