Covered call.
In plain English
In a covered call, an investor who owns at least 100 shares sells a call option on those shares and receives a premium. If the stock stays below the strike, the option expires and the premium is kept. If the stock rises above the strike, the shares can be called away at the strike price, so gains above it go to the option buyer. The position is called covered because the shares needed for delivery are already held, unlike an uncovered call. It trades unlimited upside for a fixed, immediate payment.
01Why it matters
The premium is certain and the forgone upside is not, which is the whole trade, and it looks very different in a flat market than in a market that runs.
02The math, step by step
You hold 100 shares bought at $48, now at $52, and sell a one-month $55 call for $1.20, collecting $120. If the stock finishes at $53 you keep the shares and the $120. If it finishes at $62 the shares are called away at $55, so you keep $120 plus $700 of gain and miss $700 more.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
A naked or uncovered call is sold without owning the shares, so a sharp rally means buying stock at any price to deliver. A covered call already holds the shares, so the cost of a rally is missed gains rather than an open-ended loss. The risk profiles are not comparable.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice