If you’re unfamiliar with options, click here to learn the basics and key terms/ideas you should know, then continue!
When you sell a call option, you are agreeing to potentially sell a stock that you own at a set price before an expiration date. For that contract agreement, you get paid upfront. Let’s look at an example:
Americal option contracts are in 100 share lots. So, suppose you own 100 shares of a stock trading at $100 per share. Now, you decide to sell a call option with a strike price of $115 expiring in one week. in return for selling the option, let’s say you receive a contract premium of $0.20c/share, that’s 20$. Your stock is worth $10,000 so you received a return of 0.2%. If the stock never exceeds $115/share, the money is yours to keep.

In this example, the sold call is called a “covered call” because you own the stock. In case the buyer of the option decides to exercise it, you own the stock to “cover” the call option. You can sell a call option without owning the stock, which would be called an uncovered or naked short call.
Generally, even if the stock goes over $115 for a short period of time, the buyer of the call is unlikely to exercise the option. In most cases, as long as the stock stays below the strike price at expiry, the option will not be executed, especially options that expire soon.
Risks of covered calls
One risk with covered calls is that if the stock price rises above the strike price, there is the possibility of exercise, i.e. the buyer of the call option may choose to execute the option, requiring you to sell your shares at the agreed-upon price.
In our example, the strike price is pretty far away from the stock price (15%) and the expiry is pretty close (1 week), In this case, the risk may not be as great. However, the closer you sell the call to the stock price or further away, that you sell it, the risk increases. And with that risk increase, your returns will also increase.

A real example
Let’s look at a real example of Microsoft stock as of this writing. We can see the stock price is about $425, and the closer you get to the stock price, the more money you get. So, if you were to sell a call at $427.5, you would receive $3.81. That’s 0.9% ($3.81/$425). However, there is a higher chance for you to lose your shares since the stock only has to move up a few dollars for that option to be at risk.
If we look at a higher strike price like $440, you’d make less. Around 0.1% ($0.57/$425) but there is a much less likely chance that the stock moves $15 in a week, which means it is much less risky.

If you do this weekly, even a small return like 0.1% can add up to significant returns in a year. We hope that the information provided has been of assistance in enhancing your understanding of options. At BrokerBotics, we automate such income-generating trades and allow you to select your own stocks and set your own criteria for weekly or monthly returns. Sign up Today!
Disclaimer: This blog post is for educational purposes only and does not constitute financial advice and we are not recommending any particular stocks or strategies.