A covered call is an option strategy you can use to reduce risk on your long position in an asset by writing call options on the same asset. Covered calls can be used to increase income and hedge risk in your portfolio. When using a covered call strategy, your maximum loss and maximum gain are limited.

When selling a call option, you are obligated to deliver shares to the purchaser if he decides to exercise his right to buy the option. For example, suppose you sell one XYZ call option contract with a strike price of $15, expiring next week. If the stock price closes above $15 at the expiration date, you would have to deliver 100 shares of XYZ to the buyer of the option.

The maximum amount you can lose on a covered call position is limited. The maximum amount you can lose on your long position is the price paid for the asset. If you establish a covered call position, your maximum loss would be the stock purchase price minus the premium received for selling the call option.

For example, you are long 100 shares of stock in company TUV at a price of $10. You think the stock will rise to $15 in six months and you are willing to sell the stock at $12. Assume you sell one TUV call option with a strike price of $12, expiring in six months, for $300 a contract. Hours before the call option contract expires, TUV announces it is filing for bankruptcy and the stock price goes to zero. You would lose $1,000 on your long stock position. However, since you received a premium of $300, your loss is $700 ($1,000 - $300).

  1. How do I determine what the right situation is to make a covered call?

    Learn what a covered call is, how to use a covered call strategy, and what situations to sell a call option against a long ... Read Answer >>
Related Articles
  1. Trading

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  2. Trading

    Trade The Covered Call - Without The Stock

    The standard covered call can be used to hedge positions or generate income. This calendar spread may do so more effectively.
  3. Retirement

    Write Covered Calls To Increase Your IRA Income

    Covered calls may require more attention than bonds or mutual funds, but the payoffs can be worth the trouble.
  4. Trading

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  5. Trading

    Options Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  6. Investing

    The Risks Of Writing Covered Calls

    While writing a covered call option is less risky than writing a naked call option, the strategy is not entirely riskfree.
  7. Trading

    Fix Broken Trades With the Repair Strategy

    You can recover from your losses if you know how to use this handy trader's tool.
  8. Investing

    3 Ways To Increase Your Investment Performance

    Savvy investors deploy each of their dollars to work in more than one way. Find out how to multitask your money.
  9. Investing

    Writing Covered Calls On Dividend Stocks

    Writing covered calls on stocks that pay above-average dividends is a strategy that can be used to boost returns on a portfolio, but it carries some risk.
  1. Naked Call

    A naked call is an options strategy in which the investor writes ...
  2. Covered Call

    An options strategy whereby an investor holds a long position ...
  3. Bull Call Spread

    An options strategy that involves purchasing call options at ...
  4. Call On A Put

    One of the four types of compound options, this is a call option ...
  5. Covered Combination

    An option strategy that involves the simultaneous sale of an ...
  6. Pegging

    Pegging is a method of holding a currency exchange rate steady ...
Hot Definitions
  1. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  2. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  5. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  6. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
Trading Center