What is: Covered Call

What is a Covered Call?

A covered call is a popular options trading strategy where an investor sells a call option on a stock they already own. This strategy is considered to be conservative because the investor already owns the underlying stock, which provides a level of protection in case the stock price falls.

How does a Covered Call work?

When an investor sells a covered call, they receive a premium from the buyer of the call option. In exchange for this premium, the investor agrees to sell their stock at a specified price (the strike price) if the option is exercised before the expiration date.

Benefits of a Covered Call

One of the main benefits of a covered call is the ability to generate additional income from a stock that the investor already owns. By selling call options, the investor can earn premiums on a regular basis, regardless of whether the stock price goes up or down.

Risks of a Covered Call

While a covered call can provide a steady stream of income, there are risks involved. If the stock price rises above the strike price, the investor may be forced to sell their stock at a lower price than the current market value. Additionally, if the stock price falls significantly, the investor may incur losses.

When to use a Covered Call

A covered call is often used in a neutral or slightly bullish market environment. It can be a good strategy for investors who are looking to generate income from their stock holdings while limiting their downside risk.

Key Considerations

Before implementing a covered call strategy, investors should carefully consider their investment goals, risk tolerance, and market outlook. It is important to have a clear understanding of the potential risks and rewards associated with this strategy.

Conclusion

In conclusion, a covered call is a versatile options trading strategy that can be used to generate income from existing stock holdings. By understanding the benefits and risks of this strategy, investors can make informed decisions about when and how to implement a covered call.