Covered Calls

First I am going to cover some option basics then we will get into mechanics of how the Covered Call strategy works. There are tons of great sites out there which go in depth into how options work and all kinds of different strategies for how to use them. You can take an entire college course to learn about options. For our Covered Call strategy we only need to learn about a small part of the option universe. That small part is the Call option. What we are going to be doing is selling Call options to other people. The Call option has three parts, the underlying security, the strike price, and the expiration date. For example, consider Intel, INTC. If we own 100 shares of INTC this allows us to sell 1 Call option against those shares. For our purposes the Call option and the shares are never separated, we always have both or neither. In addition, we have to buy all our shares in lots of 100 because each option contract corresponds to 100 shares. Returning to our example, suppose we own 100 shares of INTC at a net price of $20.00 per share. We could then sell 1 Call option with a strike price of 21 expiring about a month from now for $1.00 per share. We get to keep that $1 per share or $100 (since each contract corresponds to 100 shares) no matter what happens. On expiration if INTC is below 21 then the option we sold expires worthless and we get to sell one for the next month out. If INTC is above 21 then the they will take our shares from us and pay us $21 per share for them. So, if we do this every month, then our 100 shares of INTC will pay us $100 every month until it goes over $21 and we get to unload them at a profit.