What are Covered and Naked Calls?
A call option position that is covered by an opposite position in the underlying instrument (for example shares, commodities etc) is called a covered call. Writing covered calls involves writing call options when the shares that might have to be delivered (if option holder exercises his right to buy), are already owned. E.g. A writer writes a call on Ranbaxy and at the same time holds shares of Ranbaxy so that if the call is exercised by the buyer, he can deliver the stock. Covered calls are far less risky than naked calls (where there is no opposite position in the underlying), since the worst that can happen is that the investor is required to sell shares already owned at below their market value.
