I've been wanting to try some options trading for awhile, but have not gotten around to doing it until now. I just finished entering my first covered call.

This is something of a big step for me. I've been "in the market" since about August 2006, and semi-actively trading for about two years. A little while ago, my step-father told me about his regular use of covered calls to generate income and bring down the cost basis of his investments, and I thought it sounded like a neat idea.

For those who don't know what a covered call option – or any other kind of option! – is, here's a definition from the ubiquitous and oft-reliable Wikipedia (I don't generally take investment information from the big W, but it provides a good basic definition):

A covered call is a transaction in which the seller of call options already owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities. These owned shares provide the "cover" as they can be handed over to the buyer of the options when he decides to exercise them, instead of having to buy the optioned shares at unfavorable market prices in the case of "uncovered" or short call. Thus, the covered call limits the (potentially unlimited) loss that results from a short call when the price of the underlying stock moves above the strike price of the option.

So, in layman's terms, I owned 100 shares of company X, and then gave somebody else the option to buy them from me at a specific price by a specific date.

Details of the trade

Here's the rundown:

• # Contracts: 1 – each contract = 100 shares
• Option price: $0.45/share – how much someone pays me for the option to buy my shares later
• Strike price: $12.50 – the amount at which someone can choose to buy my shares
• Commissions & Fees: $5.61

So, basically, my profit from this transaction can be calculated as follows:

$0.45 × 100 shares - $5.61 = $39.39

I get that money right away. In return, I'm taking two risks:

• That the price of my stock will go above $12.50 and someone will want to buy it from me at that price.
• That the price of my stock will go down sharply, to close near or below my cost basis, before I can sell it.

I personally don't think either of these scenarios will occur, and hence I am willing to take the risk. If I'm right, it's a free bundle. I'll follow up when the option expires on May 15.