Covered Call
A covered call is a popular options strategy used to generate income in the form of options premiums. It is often employed by those who intend to hold the underlying stock for a long time but do not expect an appreciable price increase in the near term. This strategy is ideal for an investor who believes the underlying price will not move much over the near-term.
- Covered calls are a neutral strategy.
- The investor only expects a minor increase or decrease in the underlying stock price for the life of the written call option.
- This strategy is often employed when an investor has a short-term neutral view on the asset.
- A covered call strategy is not useful for a very bullish nor a very bearish investor.
- If an investor is very bullish, they are typically better off not writing the option and just holding the stock.
- The option caps the profit on the stock, which could reduce the overall profit of the trade if the stock price spikes.
- If an investor is very bearish, they may be better off simply selling the stock. Since the premium received for writing a call option will do little to offset the loss on the stock if the stock plummets.