Like all trading, you would need to make decision if this strategy is right for you. Out of the money covered calls is a covered call strategy where the moderately investor sells out-of-the-money calls against a holding of the underlying shares. The OTM covered call is a popular strategy as the investor gets to collect premium while being able to enjoy capital gains (albeit limited) if the underlying stock rallies.
Limited Profit Potential
In addition to the premium received for writing the call, the OTM covered call strategy's profit also includes a paper gain if the underlying stock price rises, up to the strike price of the call option sold.
The formula for calculating maximum profit is given below:
Max Profit = Premium Received - Purchase Price of Underlying + Strike Price of Short Call - Commissions Paid
Max Profit Achieved When Price of Underlying >= Strike Price of Short Call
Unlimited Loss Potential
Potential losses for this strategy can be very large and occurs when the price of the underlying security falls. However, this risk is no different from that which the typical stock-owner is exposed to. In fact, the covered call writer's loss is cushioned slightly by the premiums received for writing the calls.
The formula for calculating loss is given below:
Maximum Loss = Unlimited
Loss Occurs When Price of Underlying < Purchase Price of Underlying - Premium Received
Loss = Purchase Price of Underlying - Price of Underlying - Max Profit + Commissions Paid
The underlier price at which break-even is achieved for the covered call (otm) position can be calculated using the following formula.
Break even Point = Purchase Price of Underlying - Premium Received