Transcript: CIBC Investor’s Edge — Covered calls: How many can you sell?

[Covered Calls: How Many Can You Sell?]

[CIBC logo. CIBC Investor’s Edge — Covered Calls: How Many Can You Sell? A mobile phone is shown with a line graph on the screen. The screen scrolls up to show another line graph and a bar graph.]

[A CIBC Investor’s Edge employee stands in front of a wall with the CIBC logo on it and speaks.]

[A graphic is shown on the right with an icon of a document and pen, titled: “with selling or writing a call against it”. On the left side is a red screen with an icon of a bar graph with an arrow on top showing an upward trajectory and is titled: “Combine ownership of a stock”.]

>> CIBC Investor’s Edge employee: So what is a covered call? This is a strategy where we combine ownership of a stock with selling or writing a call against it. In other words, long stock, short calls. We either have shares of the company already or we go out and purchase the shares in the market, generally prior to writing the calls. Imagine you own 500 shares of XYZ Inc. in your portfolio. You've been holding the stock for a while and have been looking for ways of generating additional income.

[A graphic is shown of an icon of a document and pen and is titled: “Sell 5 XYZ calls (500 shares)”. To the right of this is an icon of money with a checkmark is labelled: “at selected strike price”. To the right is a graphic of a calendar with a label of: “and selected experts date”.]

In this case, you may choose to sell five XYZ in calls at your selected strike price and expiry date. If the call option is exercised, you will have to sell your 500 shares. Now, what would happen if you owned 575 shares? Would you be able to write more than five calls? 

[A graphic titled: “575 shares” is shown with an icon of a signed document and pen. This is labelled: “each option contract 100 shares”. This slides over and an icon of a bar graph with an arrow showing an upward trajectory slides to the right. This icon is labelled: “Round down from 575”, which then changes to “round to: 500”.] 

Since each option contract represents 100 shares, you must round down to the nearest 100 to figure out how many contracts you can actually write.

[To the right of these icons another icon is added of 3 squares balanced on each other and is labelled “75 shares odd lot”. The graphic then changes to show: “575 shares = 5 contracts”.]

In this example, the 75 shares is considered an odd lot, so you can only write calls against 500 shares or sell five contracts.

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