Booyah Breakdown: Know Your Options, Part 2

So let's say you own PG and believe the stock will trade relatively flat in the short term. You decide to sell a call option on PG for $65 at, say, $2. You immediately get the premium -- the $2 -- from the option sale. If PG doesn't move before expiration day, the option expires worthless, but you have two extra dollars in your pocket thanks to the option you sold. Nice.

But what if PG rises to $68? The option you sold would most likely be exercised, and you'd have to give up your shares. You'll have to sell them to the option holder for $65 (the strike price of the option), even though they're trading on the open market for $68.

But all is not lost -- you still have the $2 premium from the sale of the option. This caps your effective sell price at $67, which is the strike plus the premium collected from the sale of the call option.

So your overall profit here is the difference between the strike price and your original purchase price, plus the premium from the option: $65 - $53 + $2 = $14