Lesson Overview

F Covered Call

Though we rarely are covered call traders, we wanted to show you that buying stock and selling a covered call is not as complicated as people think. In less than 3 mins I'll show you how we can do that with a very easy example using Ford's stock since it's cheap just above $14 per share. Selling the covered call reduces our net cost basis on the stock below $14 leaving room for the stock to fall and still make some money.

Show Video Transcript +

I wanted to (in this take five segments here today) just quickly show you guys how you can buy a covered call and a stock that you either already own or you want to own.

It's very simple to do, but let’s first take a look at a stock that you possibly want to own, and you want to buy shares, and then you want to buy a covered call against that.

You’re going to buy the actual individual options and then at the same time; you’re going to sell a call option against those options and take in a little bit of a premium which is going to reduce your cost basis on the shares of stock.

That’s the whole point of doing this covered call. It’s fairly simple to do when you want to do a covered call. We’re going to use Ford for example. It’s a very small stock right now as far as price.

Ford has had a little bit of a drop-off, so it’s got a small price of around $14 a share, not too expensive to own if you’re going to own about 100 shares to cover that one option on the covered call.

All you have to do when you're inside of your broker platform here is go to the actual call option that you want to sell. In this case, I’m going to do the 15 strike call options for December.

They’ve got about 43 days to go and currently, Ford is trading at about 14, so this would mean that I would take any profit between where Ford is trading right now and $.15 basically because this option is trading for about $.13, $.15.

All you’re going to do is you’re going to right click in here, and you want to the right click there and go to buy, and then you want to do that you want to do covered stock. That's exactly what you’re going to do, is covered stock right there.

And what you'll see in the order form down below is you'll see that you’re going to be long 100 shares of stocks, you get the stock and then you’re also going to short one of those 15 call options for December.

That’s going to reduce your cost basis on buying this because it's not going to cost you the full amount that you’re going to pay. It’s going to cost you less $.15. You can see that our price here for the Ford shares get reduced here around $14.

By doing this covered call, we are reducing our cost basis on the shares of stock down to about $14. We’ve got about $.11 of wiggle room that we have now at the stock price. It can go down, and we still keep the stock and make a little bit of money on top of that.

It’s a great, great strategy to use. If you’re going to use it in something like Ford which is a little bit lower in price, it's fairly easy, and it doesn't tie up too much capital to own the stock.

A really good strategy and in today’s take five segments, I hope that it was helpful just to take five minutes out of your day to learn one new cool thing about options trading and investing. And as always, happy trading!

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