Covered Call

A covered call is an Options trading strategy where an investor holds a long position in an Asset (like Stocks) and sells call Options on that same Asset. This strategy is typically employed to generate additional income from the Asset while potentially limiting upside profit. The call option sold gives the buyer the right, but not the obligation, to purchase the underlying Asset at a specified Strike Price before a certain expiration date.

Example 1: An investor owns 100 Shares of XYZ Stock, currently priced at $50 per Share. The investor sells a call option with a Strike Price of $55, receiving a premium of $2 per Share. If the Stock price rises above $55, the investor may have to sell the Shares at that price, but still keeps the $200 premium earned from selling the option. If the Stock remains below $55, the investor keeps the Shares and the premium.

Example 2: An investor owns 200 Shares of ABC Corp at $30 each. The investor sells two call Options with a Strike Price of $35, collecting a total premium of $4 per Share. If ABC Corp’s Stock exceeds $35, the investor must sell the Shares at that price but retains the premium. If the Stock does not exceed $35, the investor keeps the Shares and the premium.

Case: Covered calls can be advantageous in a flat or mildly Bullish market. Investors can earn income from premiums while potentially benefiting from Stock price appreciation up to the Strike Price. However, the primary risk is that the upside potential is capped, and if the Stock surges, the investor may miss out on significant gains.