Covered option what is it, Covered option
In this regard, let's look at the covered call and examine ways it can lower portfolio risk and improve investment returns. Key Takeaways A covered call is a popular options strategy used to generate income from investors who think stock prices are unlikely to rise much further in the near-term.
A covered call is constructed by holding a long position in a stock and then selling writing call options on that same asset, representing the same size as the underlying long position. A covered call will limit the investor's potential upside profit, and will also not offer much protection if the price of the stock drops.
A covered call is therefore most profitable if the stock moves up to the strike price, generating profit from the long stock position, while the call that was sold expires worthless, allowing the call writer to collect the entire premium from its sale. Covered Call.
In this scenario, selling a covered call on the position might be an attractive strategy. Like any strategy, covered call writing has advantages and disadvantages.
If used with the right stock, covered calls can be a great way to reduce your average cost or generate income.