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How a covered call on AMD generates extra income for long-term investors
Options 10 minutes to read
Koen Hoorelbeke
Investment and Options Strategist
Summary: Long-term investors holding AMD shares can use a covered call strategy to generate extra income while limiting additional risk. By selling a call option on shares they already own, investors collect premium income and potentially lock in profits if the stock is called away at a higher price.
Note: this is marketing material
How a covered call on AMD generates extra income for long-term investors
Imagine you are a long-term investor who owns 100 shares of AMD, currently trading at $112.46. You believe in the long-term prospects of AMD but also want to generate additional income while holding the stock. One way to do this conservatively is through a covered call strategy.
What is a covered call?
A covered call means you sell a call option on shares you already own. A call option gives another investor the right (but not the obligation) to buy your shares at a set price (called the strike price) before a certain date (expiration date). In exchange, you receive a payment called a premium.
The setup
In this example, you sell a call option with a strike price of $128 expiring in 31 days (June 13). You receive a premium of $130. The buyer of the call gets the right to purchase your shares at $128 if AMD trades above this level at expiration.
How does this work for you?
- Stock stays below $128 at expiration
You keep your shares and the $130 premium is yours to keep. This extra income boosts your return, even if the stock price remains flat or slightly lower. - Stock rises above $128 at expiration
You are obligated to sell your shares at $128. Your total profit would be:
- Gain from stock: ($128 - $112.46) × 100 shares = $1,554
- Premium from selling the call: $130
- Total profit: $1,684
This represents a short-term return of about 15% over 31 days.
What happens if the stock drops?
The main risk comes from the stock itself. If AMD’s price drops, the $130 premium only partially offsets your loss. Your breakeven point is:
- Stock purchase price: $112.46
- Minus option premium: $1.30 per share (or $130 total)
- Breakeven stock price: $111.16
This provides a small cushion of about 1.2%.
Why some investors like covered calls
- Extra income: The $130 premium acts as a form of "rental income" on your shares.
- Mildly positive outlook: If you expect AMD to stay flat or rise moderately, this strategy lets you earn additional income.
- Exit strategy: If the shares are sold at $128, you lock in gains and can decide if and when to buy the stock again.
Frequently asked questions (FAQ)
- Q: Do I lose my shares if AMD rises above $128?
A: Yes, your shares would be sold at $128. You keep the $130 premium and your profit from the stock’s price increase.
Some investors may then consider using 'in the money' cash secured puts to potentially buy back shares at a lower price while generating additional income.
- Q: Can I do this with fewer than 100 shares?
A: No, you must own at least 100 shares to sell a standard covered call.
- Q: What happens if the stock falls sharply?
A: You still own the shares. The $130 premium helps slightly, but you are exposed to most of the decline in AMD’s price.
Important note
The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
Key takeaways
- Covered calls are a conservative strategy for generating extra income.
- They work best for investors comfortable with the possibility of selling their shares at the strike price.
- Always understand both the limited upside and the ongoing risk of stock ownership.
For long-term investors holding AMD shares, a covered call offers a practical way to enhance income with modest additional risk.
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