Covered Call Writing

Covered Call Writing

Covered call writing is a conservative investment strategy used in the stock market. It involves holding a long position in an asset, typically a stock, and simultaneously selling (writing) call options on that same asset. This strategy is employed by investors who seek to generate income from their stock holdings, beyond any dividends the stocks may pay.

In a covered call, the investor owns the underlying stock and sells call options in proportion to their stock holding. Each call option gives the buyer the right, but not the obligation, to buy the stock from the option writer at a specified price (the strike price) within a certain time frame.

The primary objective of covered call writing is to earn additional income through the premiums received from selling the call options. This can be particularly attractive in flat or mildly bullish markets, where the stock price is not expected to rise significantly.

However, it\’s important to note that while this strategy can provide regular income, it also caps the potential upside of the stock position. If the stock price rises above the strike price of the call options, the investor might be obligated to sell the stock at the strike price, thereby missing out on any further gains.

For a more detailed explanation, you may refer to the Wikipedia page on Covered Calls.