Class: Covered Calls
Reference Materials
- Options - Essential Concepts & Trading Strategies, edited by The Options Institute, McGraw-Hill 1999: pages 79-105
- Options For The Stock Investor, James B. Bittman, McGraw-Hill 1997: pages 97-125
"Covered Calls" (Options 103) introduces one of the simplest, yet most widely used, option strategies - the covered call. The class chapters cover the strategies, alternatives, and potential outcomes of entering into this option strategy. At the completion of the chapters and prior to the final quiz, you should understand what a covered call is, the risks, the benefits, and when an investor would choose to enter into this type of position.
Chapter 1 - Introduction
Defines what a covered call is and what the advantages and disadvantages of this strategy are.
Chapter 2 - Strategy Overview
In this chapter the benefits of the strategy and when to use a covered call are explained. Profit / loss and break-even point calculations are illustrated. This chapter also explains how time decay and changes in volatility effect a covered call position.
Chapter 3 - Strategy Specifics
This chapter is extremely comprehensive in giving a specific real life example of a covered call position and then dissecting each possible outcome, including the calculation of profit / loss and return on investment. This chapter also discusses the ramifications of dividend dates and why they must be taken into account.
Chapter 4 - Alternatives
Introduces the student to the alternatives a covered call writer has in relation to different stock outcomes and differing timeframes until expiration.
Chapter 5 - Speculative vs. Defensive
For this chapter, the student will be exposed to the different risk vs. reward relationships of aggressive covered calls and defensive covered call positions. This chapter explains the differences between in-the-money, at-the-money, and out-of-the-money covered calls.
Chapter 6 - Conclusion
The final chapter in Options 103 ties together all the material from the previous chapters. This chapter brushes over the benefits, disadvantages, and uses of a covered call position.
Chapter 7 - Review and Quiz
Review of what you have learned and final quiz.