How to Initiate a Covered-Call Position

More and more discount brokers are making it easier for individual investors to trade options, online or off. But even the simplest of option strategies — the covered-call position — can be confusing until you’ve pulled the trigger a few times.

Every options contract — be it a call, a put, a naked position, or a covered one — represents 100 shares of the underlying stock.

So if you own 300 shares of XYZ stock and want to write a call position against it, you would need to short three call contracts on XYZ. As you can see, then, every covered-call position has two “legs,” or parts: the call position and the underlying stock position that “covers” it in case the option is exercised against you.

And if you own only 50 shares of XYZ, you cannot initiate a covered call position unless you buy 50 more shares of the stock. (Because there’s no way straightforward way to short half of an options contract.)

Stracia is an “idea generating machine,” and as such, there is always a long list of stocks that we would like to own at any given time. Covered-call positions can be a great way of owning stocks at below-market prices, providing some downside insurance.