To further understand covered calls, you should be familiar with these options basics:
One option contract controls 100 shares of stock. Options are quoted on a per-share basis, so to purchase one option, the option price is multiplied by 100.
You own 100 shares of stock.
You sell 1 call option against the stock at a call bid of $2.00 - and receive $200.00 premium for shorting the call.
Every option has an expiration date. The last day an option can be traded is the day before the expiration date.
U.S. equity monthly option contracts expire on the Saturday following the third Friday of the month. (If that Friday is a market holiday, the expiration date will be that Friday.)
Last trade date for a monthly option contract is the 3rd Friday of the month.
U.S. equity weekly option contracts expire on the Saturday following the expiration date, which is always a Friday. (If that Friday is a market holiday, the expiration date will be that Friday.) Last trade date for a weekly option contract is Friday.
Every option has a strike (or exercise) price, which are generally available in $2.50, $5.00, or $10.00 increments.
For call options, the strike price represents the price at which the seller is obligated to sell the underlying security if the option is exercised before expiration date.
Moneyness refers to the relationship between the option's strike price and the current market price of the underlying security. Moneyness also refers to the likelihood of the option to have a positive monetary value at its expiration (the intrinsic value). Options are categorized in three ways: In The Money, Near the Money, and Out The Money.
In The Money - An In The Money (ITM) call option is one when the option's strike price is below the current (spot) price of the underlying security. ITM options have a positive intrinsic (monetary) value if it were to be exercised immediately. Example: stock = 50.00, option strike price = 40.00. The call option is "10 points In The Money" and its intrinsic value is $10.00. Strike prices for In-The-Money options are more expensive than Out-The-Money options because it is less likely they will expire worthless.
Near The Money - A Near The Money (also known as At The Money, or ATM) option means the option's strike price is equal to (or very near) the current (spot) price of the underlying security. Example: stock = 49.75, call option strike price = 50.00. To be included in the Near The Money classification, and option's strike price is + or - 10% of the stock's current (spot) price.
Out The Money - An Out The Money (OTM) option is one where the call option's strike price is above the current (spot) price of the underlying security. OTM options have no intrinsic (monetary) value if it were to be exercised immediately. Example: stock = 50.00, option strike price = 55.00. The call option is "5 points Out The Money" and its intrinsic value is $0.00. Strike prices for Out-The-Money options are less expensive than In-The-Money options as they are more likely to expire worthless.
Intrinsic Value is the actual value of the option...what the option is really worth if it were exercized immediately. Only ITM options have an intrinsic value.
Return if Flat is the percentage of return for this covered call assuming the stock price remains the same (i.e. flat) until the option expires. In order to calculate this figure, we need to know the Time Premium for the option. Return If Flat is the absolute value of Time Premium / Net Debit, where
Time Premium is based on the Moneyness of the contract. Time Premium is your profit (income) per share between now and option expiration.
For Out Of Money options: Time Premium = Call Bid
For In The Money or At/Near The Money options: Time Premium = (Strike + Call Bid) - (Stock Price)
Net Debit = Stock Price - Call Bid
Time Premium is an important concept when considering a covered call. Time Premium is your profit (income) per share between now and option expiration, or the amount by which the option's price exceeds its intrinsic value. It is based on the Moneyness of the contract. For call options, the intrinsic value is the In-The-Money amount for the option. If the option is At-The-Money or Out-The-Money, the option has no intrinsic value.
Time Premium is used to calculate the Return if Flat figure you'll see on the Covered Call Screener.