This scenario describes a Covered Call strategy. You have purchased 100 shares of Zscaler (ZS) at $175 and sold (written) one call option at a $175 strike price for a premium of $9 per share.
Because the strike price ($175) is the same as your purchase price, this is an At-The-Money (ATM) covered call, which acts as a conservative income-generation strategy.
The Breakdown
- Stock Purchase Price: $175/share ($17,500 total)
- Call Sold: $175 Strike, Feb 27 (1 contract = 100 shares)
- Premium Received: $9/share ($900 total)
- Net Cost Basis: $175 - $9 = $166 per share ($16,600)
Potential Scenarios (as of Feb 27 Expiration)
1. The Ideal Scenario: Stock Stays Flat (Closed at $175)
- Outcome: The option expires worthless. You keep your 100 shares and the $900 premium.
- Profit: $900.
- Return: 5.14% in 10 days (assuming premium).
2. The Bullish Scenario: Stock Rises Above $175
- Outcome: Your shares are "called away" (sold) at $175.
- Profit: You make $0 on the stock ($175 - $175), but you keep the $900 premium.
- Result: You still make $900, but you miss out on any gains above $175.
3. The Bearish Scenario: Stock Falls Below $175
- Outcome: The call expires worthless. You keep the $900 premium, but the value of your shares decreases.
- Breakeven Point: Your effective breakeven is $166 ($175 purchase - $9 premium).
- Result: You only begin to lose money if ZS falls below $166 by Feb 27. If it drops to $160, you have a $500 loss on the stock, but it's offset by the $900 premium, resulting in a $400 net profit.
Key Takeaways
- Maximum Profit: $900 (occurs if ZS closes at or above $175 on Feb 27).
- Maximum Loss: Occurs if ZS drops to $0. The maximum loss is your breakeven ($166) times 100, which is $16,600.
- Why it was done: This strategy is used to generate income ($900) while accepting that potential upside is capped at $175, while also providing a small buffer against a stock price drop.
