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Strategies & Market Trends : Position Trading Forum
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To: BarbaraT who wrote (7128)11/29/1998 1:51:00 PM
From: Wowzer  Read Replies (1) of 7247
 
Selling covered call definition. Barbara I will give it a shot.

When you sell a "covered" call you are doing just the opposite of when you buy a call. "Covered" means you already own the stock for which you selling or writing the call.

For example lets assume you own 100 shares of Dell and you think Dell has topped out for the next few weeks. You could sell one contract (contract represents 100 shares) of the Dell December $65 call for $2.50 (closing bid as of Friday). Since you are the one selling the call you will receive the $2.50 or the $250 premium immediately which you get to keep no matter what. However, if the stock closes above $65 on the third friday of December the stock will be "called" from you and the owner of the option will buy your 100 shares for $65 and you have lost out on the appreciation above $65.

If the stock closes at or below $65 nothing happens you still own the stock and you made an extra $250.00 less commissions.

Covered means you actually own the underlying stock for which you writing the call. Loss are limited to opportunity cost only if Dell closes above $65

Selling a "naked" call means you do not own the underlying stock and your losses can be unlimited. If Dell closes above $65 you must go out and buy the shares at market and turn around and sell to option holder for $65. Very risky must have deep pockets to play this game.

Hope that helps,

Rory
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