What Is a Covered Call Option?
A covered call is a transaction in which the seller of call options already owns the shares of a stock. Thus, shares provide the “cover” as they can be handed over to the buyer of the options when he decides to exercise them, instead of having to buy the optioned shares at unfavorable market prices in the case of “uncovered” or short call. In this strategy, covered call limits the (potentially unlimited) loss that results from a short call when the price of the underlying stock moves above the strike price of the option. Example: An investor has 500 shares of XXXXX stock, valued at $10,000. He sells 5 call option contracts for $1500, thus covering a certain amount of decrease in the XXXXX stock (i.e. only after the stock value has declined by more than $1500 would the investor lose money overall). Losses can not be prevented, but merely reduced in a covered call position. If the stock price drops, it will not make sense for the option buyer to exercise the option at the higher strike p
