The Trade at a Glance
- Account Size: $100K
- Underlying Stock: SMR
- Strategy: Sell 1 Covered Call
- Expiration: August 15
- Strike Price: $25
- Premium Received: $102
Why This Trade Makes Sense
Generating Passive Income
Selling a covered call allows us to collect $102 in premium, providing a steady income stream while holding shares.
Potential for Capital Gains
If SMR rises above $25, the shares may be called away at a profit, depending on the original purchase price.
Lowering Cost Basis
By collecting option premium, we reduce our effective cost basis on SMR shares, improving long-term profitability.
Risk Management
- Max Profit Scenario: If SMR closes above $25, we keep the $102 premium plus any gains from the shares.
- Mitigation Strategy:
- If SMR rises significantly, we can roll the call to a later expiration to capture more upside.
- If SMR declines, we retain the premium as compensation while continuing to hold shares.
Final Thoughts
Covered calls are a great way to generate passive income while owning shares. For a $100K account, this SMR trade ensures we maximize returns while managing risk effectively.
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