A covered call is an options strategy in which an investor holds a long position in an asset and writes (sells) call options on that same asset in order to generate income. This strategy is used to generate income from an asset that is expected to experience only limited price appreciation.
A covered call is an options trading strategy that involves the simultaneous purchase of a stock and the sale of a call option on the same stock. The call option gives the buyer the right to purchase the underlying stock at a predetermined price, known as the strike price, before the expiration date of the option. The seller of the call option is obligated to sell the stock at the strike price if the buyer exercises the option.
The covered call strategy is used by investors to generate income from stocks they already own. By selling a call option, the investor collects a premium, which is the amount the buyer pays for the option. The investor can then use the premium to offset any losses from the stock position. The investor also benefits from the potential upside of the stock if it rises above the strike price before the option expires.
The covered call strategy is a relatively low-risk strategy, as the investor is protected from downside risk by the stock position. However, the investor is also limited in their upside potential, as the stock cannot rise above the strike price. If the stock does rise above the strike price, the investor will not benefit from the full appreciation of the stock.
The covered call strategy is a popular strategy among investors who are looking to generate income from stocks they already own. It is also a good strategy for investors who are looking to protect their downside risk while still having the potential to benefit from any upside in the stock. However, investors should be aware of the limitations of the strategy, as they may not benefit from the full appreciation of the stock if it rises above the strike price.