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.
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.
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.
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.
This represents a short-term return of about 15% over 31 days.
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:
This provides a small cushion of about 1.2%.
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.
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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