Covered Call

The investor already holds the shares, so if the call is exercised, they can deliver the shares they own. This is why the call is described as covered.

The investor receives the premium immediately. In exchange, they give up any gains above the strike price, because if the share rises past the strike, the buyer will exercise and the investor must sell at the strike price.

For example, an investor owns 100 shares bought at 48. The share now trades at 50, and the investor sells a call with a strike of 55 for a premium of 2 per share, receiving 200. If the share stays below 55, the option expires and the investor keeps the shares and the 200. If the share rises to 65, the investor must sell at 55, earning a total gain of 7 from the share plus 2 from the premium, but missing out on the further rise to 65.

Covered calls are popular for generating income on shares the investor expects to stay flat or rise moderately. They do not protect against falls in the share price; the premium only partly cushions losses.