covered call
An options strategy where an investor who owns shares sells call options on those shares, generating income from the premium while capping upside potential.
Example
“She sold covered calls on her Apple shares each month, collecting $200 in premium income while agreeing to sell at $175.”
Memory Tip
COVERED call = sell a call while owning the stock. Earn premium income, cap your upside.
Why It Matters
Understanding covered calls helps investors generate extra income from stocks they already own while managing expectations about potential gains. This strategy is particularly relevant for people seeking passive income or those who believe their stock holdings may stay flat or rise modestly over a specific period.
Common Misconception
Many people mistakenly believe that selling a covered call obligates them to sell their shares at the strike price no matter what happens. In reality, they are only obligated to sell if the buyer chooses to exercise the option, which typically occurs only when the stock price rises above the strike price.
In Practice
Suppose you own 100 shares of a company trading at 50 dollars per share. You sell one call option contract with a strike price of 52 dollars expiring in one month, receiving a 200 dollar premium. If the stock stays below 52 dollars, you keep both the premium and your shares. If it rises to 55 dollars, your shares get called away at 52 dollars, but you keep the 200 dollar premium plus the 200 dollar gain on the shares, for a total profit of 400 dollars.
Etymology
COVERED (the underlying stock is owned, covering the obligation) CALL (a call option sold). The call is COVERED by owning the stock.
Common Misspellings
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