Covered Call

Covered call

A short call option position in which the writer owns the number of shares of the underlying stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the stock does not have to be bought at the market price, if the holder of that option decides to exercise it.

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Covered Call

What Does Covered Call Mean?

An options strategy in which an investor holds a long position in an asset and writes (sells) call options on that asset in an attempt to generate increased income from the asset. This strategy often is employed when an investor's short-term view of the asset is neutral. When an asset is bought long and an option is sold against the stock, the investor receives income from receiving the option premium. This is known as a buy-write.

Investopedia explains Covered Call

For example, let's say that you own shares in the TSJ Sports Conglomerate and are bullish about the company's and the stock's long-term prospects; however, in the short term you think the stock will trade relatively flat, perhaps within a few dollars of its current market price, say, $25. If you sell a call option on TSJ for $26, you earn the premium from the option sale but cap your upside potential at $26. One of three scenarios will play out: (1) TSJ shares trade flat (below the $26 strike price); the option expires worthless, and you keep the premium from the option. In this case, by using the buy-write strategy you have outperformed the stock. (2) TSJ share price drops; the option expires worthless, and you keep the premium. Again, you outperform the stock. (3) TSJ shares rise above $26; the option is exercised, and your upside is capped at $26, plus the option premium that you received. In this case, if the stock price exceeds $26 plus the premium that you received, your buy-write strategy has underperformed the TSJ shares.

Related Terms:
• Call Option
• Common Stock
• Long (or Long Position)
• Stock Option
• Strike Price