Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Covered Call

Example: You own XYZ stock which is trading at \$32

Outlook:   You are neutral to moderately bullish on XYZ stock over the next few months and are looking to generate monthly income through options.

Possible strategy:    Sell one 90 day XYZ 35 strike call at \$1.85

*All values shown are at the time of expiration. Commissions and other trading fees not included.

 Stock Long Stock Profit/(Loss) Short Call Profit/(Loss) Net Profit/(Loss) 25 (\$7.00) \$1.85 (\$5.15) 30 (\$2.00) \$1.85 (\$.15) 32 0 \$1.85 \$1.85 35 \$3.00 \$1.85 \$4.85 40 \$8.00 (\$3.15) \$4.85

At Expiration:

• Maximum Profit = Stock Sale Price + Call Premium Received - (Stock Price)
• \$4.85 = \$35 + \$1.85 - (\$32)
• Breakeven = Stock Price - Call Premium
• \$30.15 = \$32 - \$1.85
• Maximum Loss = Significant with stock ownership

In Summary: Consider selling an out of the money call option on a share for share basis with your stock ownership to generate income in a stable market.  Return calculations are as follows:

Static Return Formula:

(Income/Stock Price)  x  (365/Days to Expiration)

(1.85/32) x (365/90) = 23.4%

If Called Return Formula:

(Income + Stock Gain/Stock Price)  x (365/Days to Expiration)

[1.85 + (35 - 32)/32] x (365/90) = 61.5%