- Strike price: The set price at which the purchaser can buy the underlying stock
- Expiration date: The final date the purchaser can exercise their option
- Premium: The amount the purchaser pays the seller to enter the contract. This is determined by the difference between the stock and strike price, the volatility of the underlying stock and the time to expiration.
How does writing a call option work?
To understand how to write a call option, let’s look at an example using CI Global Asset Management’s (CI GAM) 25% covered call strategy. CI GAM writes monthly call options up to 25% of an ETF portfolio. So, if an option “contract” consists of 100 shares, the portfolio must own at least 400 shares.
Example: ABC Co.
|
Total number of shares
|
400
|
|
Stock price
|
$50
|
|
Strike price
|
$50*
|
|
Total portfolio value
|
$20,000
|
|
Premium
|
$2
|
|
Expiration date
|
30 days
|
*A strike price equal to the current stock price is called an “at-the-money” call option.
In this instance, since we’re writing options on 25% of the portfolio, the ETF would receive $200 as the premium (100 shares x $2). The remaining balance of the portfolio (75%) is “uncovered” and can earn capital appreciation for additional growth.
There are now three potential outcomes:
- Pay off without exercise: If the stock price remains at $50 after 30 days, the call option will not be exercised, but the portfolio benefits from the premium received.
New portfolio value: original $20,000 portfolio value + $200 premium = $20,200
