However, for active traders, commissions can eat up a sizable portion of their profits in the long run. Commissionsįor ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages. Note: While we have covered the use of this strategy with reference to stock options, the covered call (otm) is equally applicable using ETF options, index options as well as options on futures. In comparison, the call buyer's loss is limited to the premiums paid which is $200. However, his loss is offset by the $200 in premiums received so his total loss is $500. However, what happens should the stock price had gone down 7 points to $43 instead? Let's take a look.Īt $43, the call writer will incur a paper loss of $700 for holding the 100 shares of XYZ. It is interesting to note that the buyer of the call option in this case has a net profit of zero even though the stock had gone up by 7 points. This brings his total profit to $700 after factoring in the $200 in premiums received for writing the call. Since the striking price of $55 for the call option is lower than the current trading price, the call is assigned and the writer sells the shares for a $500 profit. On expiration date, the stock had rallied to $57. So he pays $5000 for the 100 shares of XYZ and receives $200 for writing the call option giving a total investment of $4800. Breakeven Point = Purchase Price of Underlying - Premium ReceivedĪn options trader purchases 100 shares of XYZ stock trading at $50 in June and writes a JUL 55 out-of-the-money call for $2.The underlier price at which break-even is achieved for the covered call (otm) position can be calculated using the following formula. Loss = Purchase Price of Underlying - Price of Underlying - Max Profit + Commissions Paid.Loss Occurs When Price of Underlying The formula for calculating loss is given below: In fact, the covered call writer's loss is cushioned slightly by the premiums received for writing the calls. However, this risk is no different from that which the typical stockowner is exposed to. Potential losses for this strategy can be very large and occurs when the price of the underlying security falls.
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