Worked Decision Case - Academy

One decision from start to finish

A worked case is more useful when it connects the individual concepts. This hypothetical example follows an investor who owns 100 shares, is willing to sell them at a target price, and evaluates a covered call.

The numbers exclude commissions, taxes, changing volatility, early assignment, and execution friction. The purpose is to practise the decision sequence, not to recommend a trade.

Step 1: define the obligation Hypothetical

An investor owns 100 shares bought at $50. The shares trade at $52, and the investor would be satisfied selling them at $55.

One covered call matches the 100-share position.
The $55 strike is above the $50 purchase price and equals the acceptable sale price.
The investor still carries nearly all of the shares' downside risk.

Contract selection starts with an acceptable stock outcome, not with the highest premium.

Step 2: compare contracts Hypothetical

On September 1, 2026, the investor compares hypothetical $55 calls expiring September 15 (14 DTE, $1 per share) and October 1 (30 DTE, $1.35 per share). Earnings are scheduled for September 10. The 30-day contract has the narrower spread.

Both contracts include September 10 earnings. A later expiration does not avoid the event.
The narrower spread may improve execution, but does not remove earnings exposure.
To avoid this earnings event, the investor can wait until after the announcement and compare fresh quotes. The earlier premiums are no longer available assumptions.

Separate the liquidity decision from the event-timing decision.

Step 3: plan the exit before entry Hypothetical

After explicitly accepting earnings exposure, the investor sells one 30-day $55 call for $1.35 per share ($135). Shares were bought at $50 and trade at $52 at option entry.

Step 3: plan the exit before entry: hypothetical comparison
Stock at expiry	P&L since $50 purchase	P&L since $52 call entry
$44	−$465	−$665
$52	+$335	+$135
$60	+$635	+$435

Hypothetical combined stock and option P&L for one covered call. Breakeven is $48.65 from share purchase or $50.65 from call entry. Assumes assignment above $55; excludes costs, dividends, taxes, and early assignment.

If the stock falls, the premium provides only a small offset to share losses.
If the call loses most of its value, the investor may close it rather than wait for the last dollars.
If the stock rises through $55, accepting assignment remains an acceptable planned outcome; any roll is evaluated as a new trade.

Sizing and exit rules belong in the entry decision because they define what the investor is actually accepting.

Common misconception

Myth: Completing a checklist guarantees a good result.
Reality: A checklist improves consistency, but market prices, volatility, liquidity, early assignment, and unexpected events can still produce a loss.

Key takeaway

A complete option decision connects the stock outcome, contract quality, position size, and exit plan before entry.