Covered calls are one of the simplest strategies in options trading, as you buy the stock, sell a call against it and collect income. This trade works great in a sideways market. And a trade we made at Cabot Options Trader in Ford (F) is a perfect real-world example of this strategy. Let’s break it down.
The Original Trade
We bought 100 shares of F stock at $14.53 and immediately sold the July 15 Call for $0.87 in premium. That brought our cost basis down to $13.66 right out of the gate. The whole idea behind a covered call is using the premium collected to lower your effective purchase price and build in a cushion if the stock goes nowhere or even dips a bit.
And please note, if you are new to options trading, at Cabot Options Trader, I walk you through exactly how to execute a covered call, and all options trades, step by step, while also breaking down the risks and rewards.
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Roll #1: Buying Back the July 15 Call, Selling the August 14 Call
As the July 15 call bled off nearly all of its value into expiration, we bought it back for just $0.05, essentially closing out a position that had done its job. That small debit ticked our cost basis up slightly, from $13.66 to $13.71.
We then turned around and sold the August 14 Call for $0.63 in fresh premium, and it dropped our cost basis all the way down to $13.08. This is the heart of covered call management: Close the old short call once it’s mostly dead and immediately sell a new one to keep the income machine running.
Roll #2: Buying Back the August 14 Call, Selling the September 14 Call
Same playbook the next month. We bought back the August 14 call for $0.13, nudging the basis back up to $13.21. We then sold the September 14 Call for $0.46, pulling the basis down to $12.75.
Notice the pattern across both rolls: We’re consistently paying a small amount to close a call that’s nearly worthless, then collecting a considerably larger amount to sell a new call further out in time.
Don’t Forget the Dividend
On top of the three rounds of call premium, F also paid us a $0.15 dividend along the way simply for holding the stock shares. That dividend further reduced our cost basis, bringing us to our current cost basis of $12.60 per share.
The Full Ledger
| Action | Price | Running Cost Basis |
| Bought 100 shares of F | $14.53 | $14.53 |
| Sold July 15 Call | $0.87 credit | $13.66 |
| Bought back July 15 Call | $0.05 debit | $13.71 |
| Sold August 14 Call | $0.63 credit | $13.08 |
| Bought back August 14 Call | $0.13 debit | $13.21 |
| Sold September 14 Call | $0.46 credit | $12.75 |
| Collected dividend | $0.15 credit | $12.60 |
Where the Income Came From
| Source | Amount |
| July 15 Call premium collected | $0.87 |
| July 15 Call bought back | ($0.05) |
| August 14 Call premium collected | $0.63 |
| August 14 Call bought back | ($0.13) |
| September 14 Call premium collected | $0.46 |
| Dividend received | $0.15 |
| Total income collected per share | $1.93 |
Added up, we collected $193 of call and dividend yield in just a couple months’ time.
What’s Next
This is about as textbook as a covered call roll gets. The market and F stock have been mostly choppy and going nowhere, and in the meantime we are booking gains every month via call sales.
Finally, where F stock closes on September expiration is anyone’s guess. That being said, for now my plan is to continue to roll these short calls and collect premiums, creating yield in a choppy market.
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