If I write a covered call, how much does it cost me or ...is it free to me since I own the shares already?

Answer 1

At the time you sell a covered call you receive the premium.

It is "free to you" in the same sense that it is "free to you" if you agree to paint someone's wall for $20. In both cases you receive money in return for an obligation.

With the paint job you agreed to do some work for money.

With the option you agreed to give any any benefit (profit) you could have received if the stock price move up more than a certain amount.

To learn more about covered calls see

http://www.cboe.com/Strategies/EquityOptions/CoveredCalls/Part1.aspx

Answer 2

When you write a covered call, you receive the premium as income (less the broker's commission, of course). Of course, you risk losing your stock by doing this, so make sure that you're willing to sell your position.

If the contract expires without the stock being called, you keep the premium and the stock. This typically happens if the stock price falls below the option's strike price.

If the stock is called, it will be sold at the strike price. You will receive the proceeds less the commission. You will still have the premium that you collected.

You can also buy the call back if you decide to keep the stock. If the option has decreased in price, you make a profit. If the option has increased in price, you will lose money.

Answer 3

It costs you the commission, and it costs you any profits you might make if the stock goes up beyond the strike price.

It's a great deal for brokers.

For the life of me, I can't understand why anyone would want to limit their upside potential, when this is why they purchased the stock in the first place. The downside protection you receive is limited to the small premium you receive; very limited.

Hmm, limited potential, limited protection; not a very good deal.