COVERED CALL

Summary

A covered call is an options trading strategy where an investor who owns shares of a stock sells call options on those same shares to earn additional income. The position is 'covered' because the investor actually owns the underlying stock, which protects them if the call option is exercised. This is considered a moderately conservative strategy that can generate steady income from stock holdings, though it does limit potential upside gains if the stock price rises significantly.

Usage Context

Essential when learning income-generating strategies, risk management in options trading, and portfolio enhancement techniques. Important for understanding how to monetize existing stock positions while managing opportunity cost.

Common Confusions

• Thinking covered calls are risk-free because you own the stock
• Not understanding that profits are capped at the strike price
• Confusing covered calls with naked calls
• Believing you can't lose money on covered calls
• Not realizing the stock can still decline in value