Covered Call Strategy

The covered call is a common options strategy that can be used to generate extra income on an underlying position. This strategy should be employed if the investor has a short-term neutral to slightly-bullish opinion on the underlying stock. This strategy, also known as a "buy-write", involves two trades:

  1. Purchasing an underlying stock (equity or index)
  2. Selling a call for a premium

This strategy is considered to be safe, compared to other options strategies, because if the position is assigned (because the stock rises), the investor is covered.

For example, let's say you purchase 100 shares of XYZ stock for $100 per share. You then sell a call option on XYZ with a strike of $110 at a cost of $5. If the stock rises significantly

When considering a covered call, there are several items to consider, including:

  • Downside Protection - the amount the stock can fall before incurring a loss
  • Exercised ROI - the total return on investment one will receive if the option is exercised
  • Unchanged ROI - the return on investment if the stock remained unchanged