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Covered vs. Uncovered Call Options Strategy

Instructor: Ilkin Hasanzade
Options contracts are one of the most widely used financial instruments. This lesson covers the basic characteristics of call options, as well as covered and uncovered call options strategies.

Call Options

Imagine that you would like to buy a flight ticket for a trip in six months. The current ticket price is $1,200, but you are sure it will go up to $1,300 as it gets closer to the travel date. However, you are a couple of weeks away from your next paycheck and don't have enough money to purchase the ticket right now. So, how can you secure the current price of $1,200 until your next paycheck?

Unfortunately, there is no way of securing a future price for flight tickets. However, when it comes to stock purchases, you can easily secure a price using call options contracts in financial markets.

Options are derivative contracts that derive their value from underlying assets. Call options give their owners an option, but not an obligation, to buy an underlying asset for a predetermined exercise price by a certain expiration date.

Covered vs. Uncovered Call Options Strategies

Let's say an investor buys a call option on Doodle Corp.'s stock from an option seller, aka option writer, with an exercise price of $1,200. This gives the investor the right to buy a stock for $1,200 before the expiry date, even if the market price of the stock goes up to $1,300. In return, the investor pays the seller a small premium - the purchase price of the option contract.

Now, let's look at this transaction from the writer's perspective. After selling the option, the writer gives an investor the right to buy the stock for $1,200. Therefore, if the investor decides to exercise the option, it is the writer's obligation to sell Doodle Corp.'s stock to the investor for $1,200. In return, the seller is being paid a premium. Here is how this transaction flow looks.


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In a covered call option strategy, the writer already owns Doodle Corp.'s stock and is ready to sell it to the investor. In an uncovered call option strategy, aka ''naked'' strategy, the writer doesn't own Doodle Corp.'s stock and has to buy it from someone else before delivering it to the investor.

  • Covered Call = Long Stock + Short Call = Owning Stock + Selling Call Option
  • Uncovered Call = Short Call = Selling Call Option

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You may wonder what happens if the stock price goes down to $1,100 instead of up to $1,300. In that case, the investor will not exercise the call option and will let it expire. After all, why would anyone buy a stock for $1,200 through the options contract when it can be purchased for $1,100 somewhere else? Remember, the buyer of the option has a right, but not an obligation, to purchase the stock at a predetermined price.

Meanwhile, the writer doesn't have any obligation if the buyer chooses not to exercise the contract and simply keeps the premium. That's why selling the call options is such an attractive source of profit for many.

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