Capstone, a simple options playbook

Assume 100 shares of XYZ are owned at $48, and 1 XYZ 52 call expiring in 21 days is sold for 1.20. With a 100 multiplier, the premium received is $120 before fees. The option is treated as a standard American-style equity option.

At entry, the share position value is $4,800 and the short call premium received is $120. The gross covered call position basis, net of premium, is therefore $4,680.

After 10 days, suppose XYZ is still $48 and the 52 call falls from 1.20 to 0.55 because time has passed and the option remains out-of-the-money. The unrealised gain on the short call is 0.65, or $65. This shows the basic effect of time decay on an out-of-the-money short option when other factors are broadly steady.

If XYZ closes at $50 at expiry, the 52 call expires out-of-the-money, the shares remain in the account, the $120 premium is kept, and the stock has an unrealised gain of $200 versus the original $48 cost. Total gross position gain at expiry versus original stock cost is $320.

If XYZ closes at $55 at expiry, the 52 call finishes in-the-money. If it is held through expiry and assigned, the shares are sold at $52. The stock gain realised is $400, the option premium kept is $120, and the total gross gain is $520. Gains above $52 are forfeited because the covered call caps upside.

The lesson is simple: a covered call fits when income and a pre-accepted sale price matter more than unlimited upside. The main management question is whether to allow assignment or to close or roll before expiry if the shares are not meant to leave the account.

Assume XYZ shares trade at $100 and the view is moderately bullish over the next month. Compare two call options with the same expiry in 35 days: the long 100 call is quoted 4.00 bid and 4.20 ask, while the short 105 call is quoted 2.10 bid and 2.25 ask. A 100/105 long call debit spread is entered at a net debit of 2.05 using a limit order.

With a 100 multiplier, the net cost is $205 before fees. The maximum value at expiry if fully in-the-money is the width of the strikes, 5.00. That gives a maximum profit of $295 and a maximum loss of $205.

The liquidity check matters here. The long leg is 0.20 wide and the short leg is 0.15 wide. This expiry is chosen because the spreads are acceptable relative to premium, and 35 days leaves time for the move without immediately entering the fastest part of decay. A limit order is used because market orders can receive worse prices when displayed size is limited.

The entry rationale is straightforward. Buying the 100 call outright would cost about $420, while the spread costs about $205, roughly halving premium outlay in exchange for capping upside above $105. That suits a modest rather than explosive bullish view.

The exit plan is written before entry: consider closing if the spread reaches about 70 to 80 per cent of maximum value before expiry, close if the thesis breaks or if the spread value falls by about 40 to 50 per cent from entry, and reduce or exit if the move has not happened by around 10 days to expiry rather than allowing theta to accelerate sharply.

The expiry plan also matters. Avoid holding to expiry if one leg could remain active while the other is not managed, because spread positions can still create risk if protective legs are not exercised or otherwise acted upon.

One possible outcome is that XYZ rises to $104 with 14 days left and the spread marks at 3.40. The position is then worth $340, so gross profit if closed is $135. Closing early removes remaining time and exercise risk.