A Covered Call strategy is an investment strategy used in options trading. It involves owning or buying shares of a stock and selling call options on the same stock. Here are the main points:
- Ownership: The investor owns shares of a stock.
- Selling call options: The investor sells (“writes”) call options for the same stock. These options grant buyers the right to purchase the stock at a specified price (“strike price”) before a certain date (“expiration date”).
- Premium: The investor receives a premium (money) for selling the call options.
- Possible outcomes: If the stock price stays below the strike price, the options expire worthless, and the investor keeps the premium. If the stock price rises above the strike price, the option may be exercised, requiring the investor to sell their stock at the strike price but still keep the premium.
The strategy aims to generate additional income (the premium) and can provide a degree of protection against modest price declines in the underlying stock. However, it also limits the potential upside if the stock’s price rises significantly.