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Covered Call Writing (CCW)

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Lesson 1: Option Basics

Topics covered in this chapter are:

  • What Is an Option?
  • Terminology
  • Table 1.1: A Stock Option Contract’s Rights and Obligations
  • Table 1.2: In-the-money, At-the-money, and Out-of-the-money
  • Intrinsic Value
  • Time Value
  • Option Pricing
  • The Difference Between Stock Price and Strike Price
  • Time Remaining Until Expiration
  • Future Volatility of the Stock Price
  • The Cost of Carrying the Underlying Stock
  • Table 1.3: Effect of an Increase in each Factor
  • Table 1.4: Effect of a Decrease in each Factor
  • Maximum Potential Profit and Loss
  • Long Stock
  • Figure 1.1: Profit/Loss Diagram – Long MNO Stock
  • Short Call
  • Figure 1.2: Profit/Loss Diagram – Short MNO June 50 Calls at Option Expiration
  • Combining Positions

Lesson 2: The Covered Call Strategy

Topics covered in this chapter are:

  • What Is a Covered Call?
  • Profit Potential
  • Downside Protection
  • Maximum Profit, Maximum Loss and Break-Even Stock Price at Option Expiration
  • Figure 2.1: Profit/Loss Diagram – DFG May 50 Covered Call
  • Types of Covered Calls
  • Figure 2.2: Profit/Loss Diagram – DFG May 40 Covered Call and May 50 Covered Call Compared
  • Calculating Rates of Return
  • Static Return
  • The If-Called Rate of Return
  • Percentage Downside Protection

Lesson 3: Strategy Decisions

Topics covered in this chapter are:

  • Selecting Covered Call Strategies
  • Using the Static and If-Called Calculations
  • Percentage Downside Protection
  • Importance of Stock Selection
  • Managing Covered Call Positions
  • Threat of assignment
  • What to Do if the Stock Price Declines
  • Figure 3.1: Rolled Down KPP Covered Call
  • What to Do if the Stock Price Rises
  • Figure 3.2: Rolled Up KPP Covered Call
  • What to Do as Expiration Approaches
  • Rolling Out
  • Rolling Up-and-Out
  • Rolling Down-and-Out