Covered Call Strategy: A Quick Overview
The covered call is a conservative options strategy designed to generate income while holding an underlying asset. Here’s how it works:
How Works Covered Call Strategy
- Own the Asset: Hold shares of the underlying asset (e.g., stocks or cryptocurrencies).
- Sell a Call Option: Write (sell) a call option against your holdings, setting a strike price above the current market price.
- Earn Premiums: Collect the option premium as income.
Best Time to Use: In a sideways or mildly bullish market, where the price of the asset is unlikely to surge far beyond the strike price.
Goals of the Strategy
- Income Generation: Earn a steady premium from the call option.
- Risk Mitigation: Offset potential declines in the asset’s price with the premium collected.
- Limited Upside: If the asset’s price rises above the strike price, you may be obligated to sell at that price, capping your profit.
Key Considerations
- Max Profit: Premium received + gains up to the strike price.
- Max Loss: Limited to the decline in the asset’s price, offset by the premium.
- Obligation: Be prepared to sell the asset if the option is exercised.
The covered call is ideal for income-focused traders willing to accept capped upside in exchange for reduced risk and consistent earnings.