Options Fundamentals: Cover Call Strategy

What is an Option:
It is a contract that gives the holder the right, but not the obligation, to buy an asset at a strike price by a certain date. A “call” gives the holder the right to buy an asset while the “put” gives the holder the right to sell an asset. And those who are involved in the market and trading of a contract are the buyers and sellers of the calls or puts.  Each contract is equivalent to one-hundred shares of a security.

Cover Call Strategy: 
The investor would have a long position in the security and a will have a short position on the option. An investor would typically try to make income off the premium of the short sell, while maintaining a neutral short term view of the security.  In theory: Profit is capped and limited, while loss can potentially be your initial investment through a portfolio value equaling zero.

Variables:
· Vo = Initial Investment
· Vt = Current Portfolio Value
· π = Profit
· K = Strike Price
· St = Current Stock Price
· Co = Call Price per share

Value of the Strategy:
·  Vo = So - Co
· If K < St then  Vt = K
· If K >= St then  Vt = S