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A covered call is a call sold against a long futures position; that is, the writer of the call takes on a potential obligation to provide a futures contract at a specific price, and tries to mitigate his risk by simultaneously buying futures. The premium is collected up front at the initiation of the position. Income is earned if futures hold stable to slightly higher or lower, allowing the writer of the call to retain the options premium. The position is helped by lower volatility and the passage of time, all of which make it unlikely that the options contract will be exercised.

Profits are limited to the premium received plus some appreciation in the futures position. Losses are potentially unlimited. The premium received from the sale of the call acts as a partial hedge against the futures position as prices decline.

Position
Premium
Dollar Premium
Delta
Buy one $20 crude oil futures 0000 +1.00
Sell one $22 call $0.50$500 -.29
- Net Credit $0.50 $500 00
- Net delta 0000 +.71
00 0000 00
Maximum risk unlimited00 00
Maximum profit $2.50 per barrel$2,500 per covered call 00
Break-even futures price $19.50 00 00

Position
Premium
Dollar Premium
Delta
Buy one $260 crude oil futures 0000 +1.00
Sell one $270 call $3.00$300 -.30
- Net Credit $3.00 $300 00
- Net delta 0000 +.70
00 0000 00
Maximum risk unlimited00 00
Maximum profit $13.00 per oz.$1,300 per contract 00
Break-even futures price $257 00 00

  

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