| Covered call option yields assume the stock is purchased in a cash account and the
option is sold right away so that the net investment is the stock purchase price
minus the option premium. The unchanged yield is equal to the income divided by the
net investment. The income is the premium received for out-of-the money calls, or the
amount above and beyond the in-the-money amount for in-the-money calls. The "yield if
called" adds in the gain from selling the stock at the strike price. With covered
call writes, the goal is to profit from the option income and possibly even more if
the stock is called away. If the stock goes down below your purchase price by more
than the option income received, you have a loss. If it goes up above the strike
price you have a gain, but perhaps less of a gain than if you had not sold the call,
just held on to the stock. |
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