A call option is a contract giving the buyer the right (but not the obligation) to purchase 100 shares of a stock at the strike price on or before the expiration date. The buyer pays a premium; the seller collects it and takes on the obligation to deliver the shares if exercised.
In the Wheel Strategy: After being assigned shares, wheel traders sell call options against their stock position. These are covered calls — "covered" because they already own the underlying shares. The premium collected reduces ACB, and if the stock rises above the strike, the shares are sold (called away) at a profit.
Examples of Call Option in Action
- 1Owning 100 shares of GOOGL and selling a $180 call — you collect premium and agree to sell your shares at $180 if called away.
- 2A call buyer profits when the stock rises above the strike plus premium paid. The covered call seller profits from the premium if the stock stays below the strike.
- 3Selling a $200 call on a stock held at a $195 ACB — any assignment at $200 results in a $5/share capital gain plus all premiums collected.