Transcript: CIBC Investor’s Edge — How many covered calls can I sell?

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[How many covered calls can I 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.]

>> 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. 

[An icon of a bar graph is shown, with an arrow on top showing an upward trajectory, labelled “Combine ownership of a stock.” A document and pen icon is shown on the right, labelled “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.

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.

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

Now, what would happen if you owned 575 shares? Would you be able to write more than five calls?

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.

[An icon of a signed document and pen is shown, 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, labelled “Round down from 575,” which then changes to “round to: 500.”]

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

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

[CIBC Investor’s Edge is a division of CIBC Investor Services Inc. This document is provided for general informational purposes only and does not constitute investment advice. The information contained in this document has been obtained from sources believed to be reliable and believed to be accurate at the time publishing, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. The CIBC logo is a registered trademark of CIBC. The material and its contents may not be reproduced without the express written consent of CIBC.]

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