Understanding Options

In order to really understand covered calls, investors need to have a basic understanding of options. When writing covered calls, investors sell a CALL while simultaneously owning the underlying stock. Therefore, in order to trade covered calls the understanding of a CALL is imperative.

WHAT IS AN OPTION?

There are two types of options, a CALL and a PUT. Only CALLS are used for covered call writing, so that will be our focus. A CALL is a contract in which the writer agrees to sell the stock that the option contract represents to the buyer at a specified price, at or before a specified date. The buyer may exercise the contract at any time before the expiration date (strike date). The buyer also has the right, but not the obligation, to buy the stock that the option contract represents. Each option contract represents 100 shares of a stock. Buyers of calls are hoping that the stock price appreciates and therefore the CALL they have purchased will also appreciate.

WHERE ARE OPTIONS TRADED?

Options are traded on five different exchanges:

1. The Chicago Board Options Exchange (CBOE)
2. American Stock Exchange (ASE)
3. New York Stock Exchange (NYSE)
4. Pacific Stock Exchange (PSE)
5. Philadelphia Stock Exchange (PHLX)

1. Introduction
2. Definition
3. Understanding Options
4. Key Terms
5. The Basic Concept
6. The Simplified Covered Call Process
7. Benefits of Covered Call Writing
8. Risks of Covered Call Writing
9. Calculating A Return
10. Getting Started