Economics Options And Futures Questions Medium
A covered call strategy is an options trading strategy where an investor who owns the underlying asset (such as stocks) sells call options on that asset. This strategy involves selling call options to generate income while still holding the underlying asset.
In a covered call strategy, the investor sells call options with a strike price above the current market price of the underlying asset. By doing so, the investor receives a premium from the buyer of the call option. In return for the premium, the investor agrees to sell the underlying asset at the strike price if the option is exercised by the buyer.
The main objective of a covered call strategy is to generate income from the premiums received from selling call options. If the price of the underlying asset remains below the strike price, the options will likely expire worthless, allowing the investor to keep the premium as profit. However, if the price of the underlying asset rises above the strike price, the investor may be obligated to sell the asset at the strike price, potentially missing out on further gains.
This strategy is considered "covered" because the investor already owns the underlying asset, which can be used to fulfill the obligation of selling the asset if the call option is exercised. This reduces the risk compared to an uncovered or naked call strategy, where the investor does not own the underlying asset and may need to buy it at a potentially higher price to fulfill the obligation.
Overall, a covered call strategy can be used by investors to generate income from their existing holdings while potentially limiting their upside potential if the price of the underlying asset increases significantly.