Covered Call Definition. A Covered Call is an options strategy in which an investor holds a long position in an asset (security, commodity or currency) and sells (writes) call options on that same asset in order to create additional income. The strategy is appropriate if the investor believes that in the short-term horizon, his asset value in the market will remain flat or neutral. For example, you may be long in a particular currency that is stable in a ranging market. If you sell calls at a strike price above your present value, you pocket the premiums as additional income. However, you have “capped” your gain potential at the level of the strike price. The strategy can also be used to write short options. A Covered Call is also known as a “buy-write”.
What is the difference between a covered call and a call?
A covered call is an options strategy that consists of selling a call option that is covered by a long position in the asset. ... An investor in a naked call position believes that the underlying asset will be neutral to bearish in the short term. For example, suppose an investor is long 500 shares of stock DEF at $8
How does a covered call work?
Covered call writing is simply the selling of this right to someone else in exchange for cash paid today. ... A call option is a contract that gives the buyer of the option the legal right (but not the obligation) to buy 100 shares of the underlying stock at the strike price any time before the expiration date
What does it mean to write a covered call?
When you sell a covered call, also known as writing a call, you already own shares of the underlying stock and you are selling someone the right, but not the obligation, to buy that stock at a set price until the option expires—and the price won't change no matter which way the market goes.
When should you buy back a covered call?
Expiration: Do nothing and let your options expire worthless. Assignment: Do nothing and let your stock be called away at or before expiration. Close-out: Buy back the covered calls (at a gain or loss) and retain your stock. Unwind: Buy back the covered calls (at a gain or loss) and simultaneously sell your stock.