A Beginner's Guide to the Stock Market

by Matthew R. Kratter

So we buy 100 shares of the stock at 47.48, and immediately sell one August 48.00 call option for 1.30. 100 shares of the stock costs us $4,748 (no commissions are charged if we use Robinhood.com). By selling an August 48.00 call option, we are giving someone the right to buy our 100 shares of XYZ stock from us at 48.00 anytime before the option expires in mid-August. In exchange we get to pocket $130. We sold the call option for 1.30 and each call option is based on 100 shares of stock, so we multiply 1.30 by 100 to get $130. We get to keep this $130 no matter what happens to the stock. We are also entitled to any dividends that the stock pays while we're holding it. If the stock is above 48 (the strike price of our call option) near expiration, the stock will be taken away from us at 48.00 and $4,800 will be deposited into our account (100 shares times 48.00). We paid only $4,748 for the stock, so that gives us a profit of $52 on our stock ($4,800 minus $4,748). Add that to the $130 that we pocketed from the call option, and you'll see we'll end up making $182. You'll notice that in this example, we sold something (a call option) that we didn't already own. Don't worry about this for now.