How to enhance returns with covered call strategy for NVIDIA shareholders

On October 16th, NVIDIA experienced a total options trading volume of 3.63 million contracts, with 64.41% being call options, which indicates that most investors are trading on call options. For investors holding NVIDIA shares, using option strategies can be a smart way to boost returns. One popular strategy worth considering is the covered call.

The covered call strategy is to long stocks and short call options at the same time. It involves two main steps: owning the underlying stock (in this case, NVIDIA) and selling out-of-the-money (option strike price>current share price) call options on the same shares. Each option contract typically represents 100 shares, so you'll need at least 100 shares of NVIDIA to sell one call option.

Yield Enhancement: If you hold a stock and want to earn extra income through the premiums from selling call options, a covered call can be an effective strategy, especially in a sideways or slightly bullish market.

Neutral to Slightly Bullish Outlook: When you expect the stock to remain relatively stable or rise slightly, a covered call can help you earn income without the risk of significant loss in stock value.

Target Price Realization: If you have a target sell price for your stock, selling a call with a strike price near that target can help lock in potential profits if the stock reaches that level.

Reducing Position at a Favorable Price: If you want to gradually reduce your holdings in a stock, covered calls provide a way to potentially sell shares at a higher price while earning premiums.

Capped Profit: A covered call has a maximum profit limit. If the stock price rises above the strike price, you might be required to sell your shares. This prevents you from benefiting from any further price increases.

Limited Loss: With a covered call, losses are limited because you own the underlying stock. However, the writer of the option is still exposed to the risk of loss related to holding the underlying stock. In theory, if the stock goes down to zero, they would have lost their entire investment in the stock except for the small premium income gained from selling the call option.

Suppose you own 100 shares of NVIDIA, trading at $135. You decide to sell a November 15th call option with a $145 strike price. The option premium is $4 per share, providing you with a total premium of $400.

Breakeven Price = Stock Purchase Price - Premium Received, Breakeven Price = $135 - $4 = $131

Outcome: The call option is exercised, and you are obligated to sell your NVIDIA shares at $145.

Profit Calculation:

Stock Profit: ($145 - $135) x 100 = $1,000

Option Premium: $4 x 100 = $400

Total Profit: $1,400

In this scenario, your maximum profit is achieved because the stock price has risen above the strike price, and you have also earned the option premium.

Outcome: The call option expires worthless, and you retain your NVIDIA shares.

Profit Calculation:

Option Premium: $4 x 100 = $400

Total Profit: $400 (plus any unrealized gain if the stock price is above $135 but below $145)

In this scenario, you profit from the option premium while retaining potential gains from holding the stock, as long as the stock price remains above $135.

Outcome: The call option expires worthless, but the stock price is below the breakeven point of $131.

Loss Calculation: ($131 - Latest Price of NVIDIA ) x 100

In this scenario, the premium provides a cushion against losses, but you will incur a net loss if the stock price falls significantly below $131.

By employing this covered call strategy with NVIDIA, you can capture additional income through the premium while setting a potential exit point for your shares at $145. This approach is particularly effective if you anticipate the stock to remain stable or moderately increase in the short term. It is suitable when you anticipate that the actual volatility of the underlying asset will be less than the implied volatility.