Covered Calls Strategy

A covered call is an options trading strategy in which an investor holds a long position in an asset and sells call options on that same asset in an attempt to generate income. The strategy is called "covered" because the investor owns the underlying asset, which is used to cover the obligation to sell the asset at the agreed-upon strike price if the call option is exercised. Overall, covered call strategies can be a useful way for investors to generate income from their holdings while also limiting their potential downside in the event of a stock price decline.

View Detailed Example

Suppose you own 100 shares of XYZ company, which is currently trading at $50 per share. You believe that the stock's price will remain relatively stable over the next few months, but you also want to generate some income from your investment. To do this, you could sell one call option on XYZ with a strike price of $50 and a expiration date of three months from now. If the stock's price remains the same or increases, the call option will expire worthless, and you will keep the premium received from the sale of the option as income. However, if the stock's price decreases significantly, the call option may be exercised, and you will be required to sell your shares at the agreed-upon strike price of $50, potentially resulting in a loss.

Max Profit: Maximum profit is limited to strike price of the short call option minus the purchase price of the underlying security, plus the premium received.

Max Loss: Maximum loss is limited to the the purchase price of the underlying security minus the premium received.

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