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00:13 Speaker A
2025 is turning into another record year for options trading. And for those looking to add some proven strategies to their toolkit, we’re breaking down some basics in this options playbook sponsored by Tastytrade.
00:26 Speaker A
And after another year of big market gains, many investors wouldn’t mind generating some income from their stock holdings without having to sell the stocks or ETFs they’re invested in. And a simple way to do that is with what’s called a covered call.
00:42 Speaker A
It’s basically an option strategy where you sell a call option while also owning the underlying stock. You’re saying, I own the shares and I’m willing to sell them at a certain price by a certain date if I’m paid up front.
01:00 Speaker A
And since we’re selling or writing the option, we collect what’s called a premium, which is like an insurance payment from the option buyer. That’s cash in your account today.
01:14 Speaker A
Now, if we did not own the underlying shares and wrote an option, we could be exposed to unlimited risk if the stock price went straight up. And since we own the shares now, if the stock price settles above our strike price on an expiration date, we just have to give up those shares taking a cash payment for them in our account.
01:45 Speaker A
So your upside is capped when the stock goes up and you might lose your shares, but you also pocket that premium, which effectively reduces the price you paid or your cost basis for those shares.
02:00 Speaker A
Now, let’s use Tesla as an example and I’ll set this up on the Wi-Fi interactive here. I’m going to show a two-year chart and if you’re noticing here, this is a cup and handle formation. It’s in technical analysis and it’s tracing out with a top of about $480. I think the absolute price uh ceiling was 489 back in late 2024, but we’ll just say 480.
02:30 Speaker A
And the next big op- operation expiration date after December is in January. The third Friday is always January 16th. and I’m going to bet that Tesla does not shoot above 480 and hold there, um, into that date. And it very well could shoot up there, but I’m going to bet by January 16th that Tesla will be below 480.
02:51 Speaker A
So, now for the trade details, which is just an example and not a recommendation by any means. We’re going to assume that we just bought 100 shares of Tesla at the somewhat current price of $445 and we’re selling the 480 strike price with an expiration of Friday, January 16th, in about a month. We’re collecting a premium of $16.43 per share or $1643 total.
03:19 Speaker A
That goes in your brokerage account and if you subtract it from the shares you bought at $445, that means on paper you now own them from about 428.
03:32 Speaker A
Finally, the max profit on this trade is $5,143, if Tesla rallies to $480 or above by expiration. And that includes the share price appreciation on those 100 shares.
03:54 Speaker A
And as I said before, if Tesla is above 480 at the end of expiration day, those shares will be taken out of your brokerage account and you’ll be paid $48,000 for them. All in all, it’s a roughly 12% return in 5 weeks on the amount at risk in this example, and that’s before any fees or tax taxes.
04:18 Speaker A
Now, let’s show how the profit or loss on this trade can vary with the Tesla stock price. Now here, the vertical axis is try tracking your profit or loss. And the horizontal axis is the Tesla share price on expiration, on January 16th. The solid vertical line, uh in the left middle, that is the $445 purchase price and the dotted line is your break even price at about 428. That’s 445 minus the 16 and change that you got paid for that premium.
04:54 Speaker A
So if Tesla’s stock sinks below $428 on expiration, you’ve lost money on the trade, with your losses getting bigger the more Tesla stock drops. But if Tesla settles higher than 428, you have made money. And notice that the profit line starts going sideways right at the $480 mark. You don’t get any more profit upside above that level.
05:19 Speaker A
Bottom line, there’s no free lunch and options aren’t for everyone. But if you take the time to understand the risks and the math, strategies like this can become part of a more deliberate plan rather than just another hot trade.