Coverin yo ass with covered calls—an options combination

Sup ya'll? You probably know that this is a dangerous time to be buyin up stocks. Volatility is through the roof, and going long aint so strong in a bear market. So what do you do when you want to make a gamble on a company you think is fundamentally wicked good? I'll tell you what I often do; it's called a covered call...

When you hook yourself up with a covered call, you are doing two things: you are going long a stock (buying some), and you are writing a contract to sell that stock later. That contract obligates you to sell the stock to some random bloke for a specific price should he or she decide to take you up on the offer. But here's the good part: random bloke has paid yo ass for this contract. This contract is called a call option. It's called an option because the holder of this contract has the option to buy the specified stock shares from you at the price specified on the contract if they really feel like it. I could talk about options all day, but I aint gonna cause you got better shit to do (like diggin a hole in the ground to put your gold stash).

I will, however, give you the lowdown of a covered call in action. The other day, I wanted to buy some shares of AMD, but given the fierce competition from INTC and the fact that peeps won't be buyin luxury video cards in a recession, it's too risky to just buy some shares of AMD straight up; you hear? So to hedge my bet, I sell some call options at the same time. When you do this shit at the same time, it's called a buy-write combo. My buy-write looked kinda like this:

• Bought 100 shares of AMD for 4.38 USD/share
• Sold 1 call option for AMD at 5.00 USD strike price for 0.40 USD/share. (1 option contract covers 100 shares)

So that makes the base cost for establishing this position 398 USD per buy-write combo because 438 - 40 = 398. These positions are usually established with the expectation of holding them until the call options we've written expires. If the contracts we sold are about to expire and AMD is trading at 5.20 USD/share, the holders of those contracts are most likely going to exercise their right to buy your shares at only 5.00. You might be thinkin "oh shit, I could have made mo money if I'd just gone long", but you'd be WRONG, FOOL! You got to pocket that 0.40 USD/share you got from selling those contracts. To help you better determine how you fare... I'll draw you a profit graph:

As you can see, while our potential profits are capped at 1.02 USD/share (25% ROI), the rise in share price needed to achieve such profits is significantly less. And most importantly (in this f'ed up conomy) the amount you lose when this shit tanks is also significantly less (0.40 USD/share less to be specific).

Anywayz, I hope I filled yo brain-machine with some extra juice. If you already knew this shit, soz bout that, I'll wow and flutter you next time.