## Description

This article is from the Investing Articles:
Stocks and Options series.

# Futures & Options: Covered Calls

Purchasing shares of stock in a company while simultaneously
selling call options on the same stock is a type of transaction known
as a "covered call." The purchasing of covered calls is a
reliable and relatively conservative approach to investing, because:
(1) if the stock is called away, the investor realizes a profit
immediately, (2) if the stock is not called away (i.e. the option
expires worthless), but remains close to the strike price, the
investor can sell more options on the stock - thus making additional
profit, and (3) if there is a downturn in the market, resulting in the
stock going down significantly in price, the investor is either
completely or partially protected as a result of the monies made
through the sale of the options.

Initially, a computerized system performs the following functions
after market close each business day:

1. Selects a limited number of stocks subject to the criterion that
each last traded with a price near the strike price of a call option
that closed with a very high premium

2. For each of the stocks selected above, computes a projected
annual return

**The computer uses the following formula to calculate the
projected annual return:**

**R = (12 / N) x ((S - C + P) / (C - P))**

Where:

**R** is the projected annual return

**N** is the number of months until the call expires

**S** is the strike price of the stock

**C** is the sum total of the cost of the stock, the commission
on the purchase of the stock and the commission on the sale of the
stock if it is called away

**P** is the premium value of the call option less the
commission on the sale of the option

Note that taxes are not included in the formula; it is left to the
reader to make his or her own tax computations to adjust the projected
annual return appropriately.

The computerized system selects stocks and ranks then using
strictly technical criteria, i.e., there is no fundamental evaluation
of the stocks performed by the computer

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