Covered Calls

The covered call is a strategy in options trading where call options are written against a holding of the underlying security.

Using the covered call option strategy, the investor earns a premium writing calls while at the same time gains all benefits of underlying stock ownership, such as dividends and voting rights, until / if he is assigned.

However, the profit potential of covered call writing is limited. The investor, in return for the premium, gives up the chance to fully profit rise in the price of the underlying.

Limited Profit

Since there is no limit to how high the stock price can be at expiration date, there is no limit to profit when implementing a long call option strategy.

Unlimited Risk

Potential losses for this strategy can be very large and occurs when the price of the underlying security falls. Versus a normal stockowner, the covered call writer's loss is cushioned by the premiums received for writing calls, if the underlying declines.