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Covered Call Strategy: A Step-by-Step Guide

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  Published in Stocks and Investing on Monday, March 16th 2026 at 14:06 GMT by Forbes
      Locale: UNITED STATES

Decoding the Covered Call: A Step-by-Step Guide

The covered call strategy revolves around a two-pronged approach. Firstly, the investor must establish a long position in PayPal stock - meaning they purchase shares. Crucially, after acquiring the stock, they then sell (or 'write') call options on those same shares. These call options grant the buyer the right, but not the obligation, to purchase the investor's PayPal stock at a predetermined price (the strike price) before a specific date (the expiration date).

The investor receives a premium for taking on this obligation. This premium is the key to the "discount" - it acts as an immediate offset to the cost of the stock. Consider a scenario where PayPal is trading at $60 per share. An investor might sell a call option with a strike price of $65 expiring in one month, receiving a premium of $2 per share. This effectively lowers the net cost of the stock to $58 ($60 - $2). If the investor could repeat this process over time, the effective cost basis could fall significantly, approaching the targeted 30% discount.

The Mechanics of Profit and Loss

Let's examine the potential outcomes. If, at the option's expiration date, PayPal's stock price remains below the strike price ($65 in our example), the option expires worthless. The investor keeps the $2 premium per share, adding to their overall return. This is the ideal scenario - collecting income without being forced to sell the stock.

However, if PayPal's stock price rises above the strike price, the option buyer will likely exercise their right to purchase the shares at the strike price. The investor is then obligated to sell their PayPal stock at $65, even if the market price is higher. While this might seem like a loss, the $2 premium received per share mitigates the opportunity cost. The investor still profits, though potentially less than if they had simply held the stock.

Assessing the Risks: Beyond the Surface

The covered call strategy isn't without its drawbacks. The most significant risk is opportunity cost. If PayPal experiences a substantial rally, the investor may be forced to sell their shares at the strike price, missing out on further gains. Choosing the correct strike price is critical - a higher strike price offers less premium but more upside potential, while a lower strike price provides more immediate income but limits potential gains.

Furthermore, understanding implied volatility and its impact on option pricing is crucial. Increased volatility generally leads to higher premiums, making covered calls more attractive, but also reflecting greater market uncertainty. Transaction costs, including brokerage fees and option contract fees, should also be factored into the overall return.

PayPal's Future: A Foundation for Discounted Acquisition?

The rationale for deploying a covered call strategy on PayPal stems from its underlying potential. Despite recent challenges, PayPal continues to be a leading force in the digital payments revolution. Its expanding suite of services, including Venmo, Braintree, and its growing cryptocurrency integration, position it for future growth. The company is also actively working to streamline its operations and improve profitability.

However, competition from rivals like Block (formerly Square), Apple Pay, and a growing number of fintech startups is fierce. PayPal needs to demonstrate its ability to regain transaction volume and maintain its market share. If the company successfully navigates these challenges, the covered call strategy could prove to be a highly effective way to acquire shares at a significant discount.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. The covered call strategy is complex and carries inherent risks. Investors should consult with a qualified financial advisor before making any investment decisions.