How a covered call on AMD generates extra income for long-term investors

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?

1. 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.
2. 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.