A covered call is a strategy used in options trading where an investor sells a call option on a stock or other underlying asset they already own. By selling the call option, the investor earns a premium, which is the price paid by the buyer of the call option for the right to purchase the underlying asset at a specific price (called the strike price) for a set period of time.
The term “covered” refers to the fact that the investor already owns the underlying asset that the call option is based on. This means that if the buyer of the call option exercises their right to purchase the underlying asset at the strike price, the investor can simply sell the asset to the buyer and fulfill the option contract. The investor is said to be “covered” because they have the underlying asset to sell if needed.
The goal of the covered call strategy is to earn income from the premiums received from selling the call option, while potentially also benefiting from any increase in the price of the underlying asset. However, the investor’s potential profit is limited by the strike price of the option, since they would have to sell the underlying asset to the buyer of the call option at that price if the option is exercised.
