Covered Call
Quick Definition
An options strategy where an investor sells call options against shares they already own, generating income from the premium while capping upside potential.
What Is Covered Call?
A covered call involves owning (or buying) shares of the underlying stock and selling (writing) call options against those shares. For every 100 shares owned, one call contract can be sold. The premium received provides income and a small buffer against downside moves, but in exchange, the seller agrees to sell shares at the strike price if the option is exercised. If the stock stays below the strike, the call expires worthless and the trader keeps both the shares and the premium. This is one of the most popular options strategies, used by conservative investors to generate additional income on existing positions. The strategy is equivalent in risk profile to selling a cash-secured put. Many ETFs (like QYLD, JEPI) implement systematic covered call strategies.
Covered Call Example
- 1You own 100 shares of XYZ at $50. You sell a $55 call for $2, collecting $200. If the stock stays below $55, you keep shares plus $200. If above $55, you sell at $55
- 2An investor sells monthly covered calls on their MSFT shares 5-10% above current price, generating an additional 1-2% income per month on top of dividends
Related Terms
Call Option
A contract giving the holder the right, but not the obligation, to buy an underlying asset at a specified price within a specified time period.
Cash-Secured Put
An options strategy where a trader sells a put option while holding enough cash to purchase the underlying stock if assigned.
Options Premium
The price paid by the option buyer to the seller for the rights conveyed by the contract, determined by intrinsic value, time value, and volatility.
Options Assignment
The process by which an option seller is obligated to fulfill the terms of the contract when the buyer exercises their right.
Wheel Strategy
A systematic options income strategy that cycles between selling cash-secured puts and covered calls on the same underlying stock.
Put Option
A contract giving the holder the right, but not the obligation, to sell an underlying asset at a specified price within a specified time period.
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