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+during this two-month period—not to short the stock. Because equity
+options are American exercise and can be exercised/assigned any time from
+the moment the call is sold until expiration, a short stock position cannot
+always be avoided. If assigned, the short stock position will extend Sam’s
+period of risk—because stock doesn’t expire. Here, he will pay one
+commission shorting the stock when assignment occurs and one more when
+he buys back the unwanted position. Many traders choose to close the naked
+call position before expiration rather than risk assignment.
+It is important to understand the fundamental difference between buying
+calls and selling calls. Buying a call option offers limited risk and unlimited
+reward. Selling a naked call option, however, has limited reward—the call
+premium—and unlimited risk. This naked call position is not so much
+bearish as not bullish . If Sam thought the stock was going to zero, he
+would have chosen a different strategy.
+Now consider a covered call example:
+Buy 100 shares TGT at $49.42
+Sell 1 TGT October 50 call at 1.45
+Unlimited and risk are two words that don’t sit well together with many
+traders. For that reason, traders often prefer to sell calls as part of a spread.
+But since spreads are strategies that involve multiple components, they have
+different risk characteristics from an outright option. Perhaps the most
+commonly used call-selling spread strategy is the covered call (sometimes
+called a covered write or a buy-write ). While selling a call naked is a way
+to take advantage of a “not bullish” forecast, the covered call achieves a
+different set of objectives.
+After studying Target Corporation, another trader, Isabel, has a neutral to
+slightly bullish forecast. With Target at $49.42, she believes the stock will
+be range-bound between $47 and $51.50 over the next two months, ending
+with October expiration. Isabel buys 100 shares of Target at $49.42 and
+sells 1 TGT October 50 call at 1.45. The implications for the covered-call
+strategy are twofold: Isabel must be content to own the stock at current
+levels, and—since she sold the right to buy the stock at $50, that is, a 50
+call, to another party—she must be willing to sell the stock if the price rises
+to or through $50 per share. Exhibit 1.4 shows how this covered call
+performs if it is held until the call expires.