Covered call
Also known as: buy-write
A covered call is a strategy where an investor who already owns shares of a sells a against that position, collecting a premium in exchange for agreeing to sell the shares at a set if the buyer of the call exercises it. It is called covered because the investor already owns the shares needed to deliver if the option is exercised, unlike selling a call without owning the underlying , which exposes the seller to unlimited losses.
The premium collected provides income and a small cushion against a decline in the , since it lowers the effective cost basis on the position by the amount received. In exchange, the investor gives up the ability to fully benefit from a large rally, since if the rises above the , the shares are typically called away at that strike, capping the gain on the position at the plus the premium collected, no matter how much higher the goes afterward.
Covered calls are commonly used by investors who hold a they are comfortable owning long term but who have a neutral to modestly positive view over the near term, and who would be satisfied selling at the chosen if the gets there. Some investors run the strategy repeatedly, selling a new call each time the previous one expires or is exercised, to generate a steady stream of income from a , though this approach still leaves the underlying shares fully exposed to a decline in the price.