What Is Covered Call?
A covered call combines a long stock position with a short call option, typically at a strike price above the current price. The trader collects the premium upfront. If the stock stays below the strike at expiration, the call expires worthless and the trader keeps both the shares and the premium.
The strategy caps upside: if the stock rallies above the strike, the call is exercised and the shares are called away at the strike price (plus the premium received). The tradeoff is income now versus uncapped gains later. Most covered call writers aim for premiums of 1-3% of stock value per month.
Covered calls are a sideways-to-mildly-bullish strategy. They underperform in strong rallies (you cap your upside) and don't protect much in crashes (the premium offsets only modest losses). On dividend-paying stocks, the combination of dividends plus call premiums forms a popular income strategy.
Related terms
- Options Contract — A derivative giving the right (but not obligation) to buy or sell an asset at a set price by a set date.
- Delta — Sensitivity of an option's price to a $1 change in the underlying.
- Theta — Time decay — how much an option loses in value per day as expiration approaches.
- Cash-Secured Put — Selling a put option while holding enough cash to buy the underlying if assigned.