A covered call is an options strategy whereby an investor holds a long position in an asset and writes sells call options on that same asset in an attempt to generate increased income from the asset.

This is often employed when an investor has a short-term neutral view on the asset and for this reason holds the asset long and simultaneously has a short position via the option to generate income from the option premium.

A covered call is also known as a "buy-write". Consequently, this strategy is not useful for a very bullish investor.

A covered call serves as a short-term small hedge on a long stock position and allows investors to earn a credit. However, the investor forfeits the potential of the stock's potential increase and is obligated to provide shares to the buyer of the option if it is exercised. The maximum profit of a covered call is equivalent to the strike price of the short call option less the purchase price of the underlying stock plus the premium received.

Stock Options Trading & Covered Call Writing

Conversely, the maximum loss is equivalent to the purchase price of the underlying stock less the premium received. One of three scenarios is going to play out:.

How and Why to Use a Covered Call Option Strategy

In this case, by using the buy-write strategy you have successfully outperformed the stock. To know more about covered calls and how to use them, read The Basics Of Covered Calls and Cut Down Option Risk With Covered Calls.

Covered Calls | Option Trading Guide

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Writing Covered Calls | Covered Call Strategy - The Options Playbook

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