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A Complete Guide to the Futures mArket
Strategy 13: Covered Call Write (Long Futures + Short Call)
example. Buy August gold futures at $1,200/oz and simultaneously sell an August $1,200 gold 
futures call at a premium of $38.80/oz ($3,880). (See Table 35.13 and Figure 35.13.)
Comment. There has been a lot of nonsense written about covered call writing. In fact, even 
the term is misleading. The implication is that covered call writing—the sale of calls against long  
positions—is somehow a more conservative strategy than naked call writing—the sale of calls without 
any offsetting long futures position. This assumption is absolutely false. Although naked call writing 
implies unlimited risk, the same statement applies to covered call writing. As can be seen in Figure 
35.13, the covered call writer merely exchanges unlimited risk in the event of a market advance (as is 
the case for the naked call writer) for unlimited risk in the event of a market decline. In fact, the reader 
can verify that this strategy is virtually equivalent to a “naked” short put position (see Strategy 35.6a).
One frequently mentioned motivation for covered call writing is that it allows the holder of a long 
position to realize a better sales price. For example, if the market is trading at $1,200 and the holder 
of a long futures contract sells an at-the-money call at a premium of $38.80/oz instead of liquidating 
his position, he can realize an effective sales price of $1,238.80 if prices move higher (the $1,200 
strike price plus the premium received for the sale of the call). And, if prices move down by no more 
than $38.80/oz by option expiration, he will realize an effective sales price of at least $1,200. Pre-
sented in this light, this strategy appears to be a “heads you win, tails you win” proposition. However, 
there is no free lunch. The catch is that if prices decline by more than $38.80, the trader will realize a 
lower sales price than if he had simply liquidated the futures position. And, if prices rise substantially 
higher, the trader will fail to participate fully in the move as he would have if he had maintained his 
long position.
The essential point is that although many motivations are suggested for covered call writing, the 
trader should keep in mind that this strategy is entirely equivalent to selling puts.
tabLe 35.13  profit/Loss Calculations: Covered Call Write—Long Futures + Short Call (Similar to  
Short put)
(1) (2) (3) (4) (5) (6)
Futures price 
at expiration 
($/oz)
premium of 
august $1,200 Call 
at Initiation ($/oz)
$ amount of 
premium received
profit/Loss on Long 
Futures position
Call Value at 
expiration
profit/Loss on position 
[(3) + (4) – (5)]
1,000 38.8 $3,880 –$20,000 $0 –$16,120
1,050 38.8 $3,880 –$15,000 $0 –$11,120
1,100 38.8 $3,880 –$10,000 $0 –$6,120
1,150 38.8 $3,880 –$5,000 $0 –$1,120
1,200 38.8 $3,880 $0 $0 $3,880
1,250 38.8 $3,880 $5,000 $5,000 $3,880
1,300 38.8 $3,880 $10,000 $10,000 $3,880
1,350 38.8 $3,880 $15,000 $15,000 $3,880
1,400 38.8 $3,880 $20,000 $20,000 $3,880