A client owns 500 shares of XYZ at $72. She wants income but is willing to sell at $80. You recommend writing 5 XYZ 80 calls at $3. She collects $1,500 in premium. If the stock rises above $80, her shares get called away, but she sold at the price she wanted. If it stays flat, she keeps the premium and the stock. That is a covered call. Now picture the same client saying, "I think XYZ could crash or skyrocket after earnings." Different outlook, different strategy.
Every listed equity option covers 100 shares. The Options Clearing Corporation (OCC) guarantees all listed option contracts. Standard options expire on the third Friday of the expiration month. Before any customer trades options, the firm must deliver the Options Disclosure Document (ODD), get account approval from a registered options principal (ROP), and have the customer sign the options agreement within 15 days.
KEY: There is no minimum deposit to trade options. The $25,000 figure you see in wrong answers is the pattern day trading threshold, a completely different rule.
Common mistakes
- Forgetting to add both premiums in a straddle breakeven. The total premium for a long straddle with a 3 put is 4 and not $3. Upper breakeven = Strike + $7. Candidates who use only one premium get $59 or $58 instead of the correct $62. Both wrong values typically appear as answer choices.
- Reporting only the premium as covered call max gain. A covered call on stock bought at $45 with a 50-strike call at $3 has a max gain of $800, not $300. The $300 is just the premium. You must include the stock appreciation from $45 to $50.
- Confusing debit and credit spreads. A bull call spread is a debit spread because you buy the more expensive (lower-strike) call. A bear call spread is a credit spread because you sell the more expensive (lower-strike) call. If you mix these up, you will calculate max gain and max loss backward.
Bottom line
- Calls give the right to buy; puts give the right to sell, at the strike price, while writers hold obligations, not rights
- A standard listed equity option covers 100 shares, is guaranteed by the OCC, and expires the third Friday of the expiration month
- Max loss for any buyer is the premium paid; an uncovered call writer faces unlimited loss, but an uncovered put writer's loss is capped at (Strike - Premium) x 100
- Covered call = own stock + write call; max gain = (Strike - Purchase price) + Premium, not just the premium
Exam shortcut
When you see a spread, immediately calculate three numbers: spread width, net premium, and breakeven. Spread width minus net premium is always one side (max gain or max loss). Net premium is always the other side. For debit spreads, the net premium is your max loss. For credit spreads, the net premium is your max gain. Memory aid: "Debit = you paid, so your max loss is what you paid.
The full lesson (about 3,370 words, 22 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C11
- C12
- C13
- C14
- C15
- C16
- C17
- C18
- C19
- C20
- C21
- C22
- C23
- C24
- C25
- C26
- C27
- C28
- C29
- C30
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