In the up scenario, the maximum gain that can be attained is
the stock finishing at $10.00 or higher.

At $10.00, you would profit from the full value of the extrinsic
value of the option which is $.50 and you would also have $.50
of capital appreciation from the stock for a total of $1.00.
This represents a 10.52% one-month return or an annualized
return of 126.32%.

It is not realistic to expect this type of return every month
but remember, recent studies show that premium selling works
approximately 80% of the time, which is still very good.

We stated earlier that the maximum return of this buy-write will
be actualized when the stock reaches $10.00 or above and the
maximum return will be $1.00, and no more than $1.00. As the
stock goes higher, the option will earn less in direct
proportion with the increase in capital appreciation.

For example, if the stock closes at $10.30 you would receive
only $.20 from the option. The option would now be worth $.30
because with the stock at $10.30, the 10 strike call would have
$.30 of intrinsic value.

Since you sold the option at $.50, you would see a $.20 profit
($.50 - $.30 = $.20). Since you bought the stock at $9.50 and it
is now $10.30 you have $.80 of capital appreciation. Combine the
two and you have a $1.00 profit.

Lets look at what happens when the stock trades up to $12.00
and see if you again have a $1.00 return on the position. At
$12.00, the option will have $2.00 of intrinsic value (stock
price strike price) because it is in the money.

You sold the option at $.50 so you have a $1.50 loss. However,
you bought the stock for $9.50 therefore you have a $2.50
capital gain. Combined, you have a $1.00 profit.

In a third example, if the stock trades up as little at $.10 you
still have a $.60 gain. You will receive $.50 from the sale of
the call which would expire out of the money thus worthless plus
$.10 of capital appreciation. $.60 represents a 6.3% one month
return.

Please refer to the chart below for examples of total dollar
profits per number of contracts, remembering that each contract
controls 100 shares of stock.

Observe that if the stock closes over $10.00, then your stock
will be called away because your short calls will be exercised.
This is correct but we will talk about position management
later. For now, lets get back to our three scenarios.

In the up scenario, you would profit with the buy-write when
the stock is up as little as a penny, but you are also limited
on our maximum profit.

You are limited on your maximum profit as defined by the formula
below:

Maximum Profit = Strike Price + Option Price Stock Price.

This method of calculation will work every time. As you see, the
buy-write has a positive but limited upside potential.