Covered Call

A Covered Call is an option trading strategy in which the trader sells a Call option yet is long a corresponding number of shares of the underlying stock related to the Call option.

The theory is that the Covered Call option writer is considered to be protected from risk due to the fact as the Call enters into loss territory when the value of the underlying stock exceeds the strike price (and becomes profitable for the Call buyer) the Call writer’s shares in the underlying will also be gaining in value.  In other words, when the Calls start losing value for the writer, the underlying stock will gain in value for the writer.  The Covered Call strategy is considered a conservative option strategy and is often times used as a source of additional income in a portfolio.  This is due to the fact that income is generated from the Covered Call writer earning a premium for each contract he writes.