Example of a Covered-Call Options Strategy

Scenario: A trader buys XYZ stock at $50 and sells a six-month $55 call option for a $4 premium. If the stock price rises to $55 or higher, the trader makes a profit of $9 per share ($5 from the stock price increase and $4 from the premium), resulting in a total return of $900 for 100 shares. However, if the stock price drops to $40, the trader's loss on the stock is offset by the $4 premium, limiting the total loss to $6 per share, or $600 for 100 shares.