Covered Call

A covered call is a strategy where someone who already owns shares of a stock sells a "call option" against those shares. A call option is a contract that gives the buyer the right (but not the obligation) to buy the stock at a set price, called the strike price, before a certain expiration date. When you sell that call, you collect a payment upfront called the premium, and in exchange you take on the obligation to sell your shares at the strike price if the buyer decides to exercise their right.

It's called "covered" because the stock you already own backs up the obligation. If the option buyer exercises and demands the shares, you already have them to deliver — you're not scrambling to buy stock at a possibly higher market price to fulfill the contract. This is the opposite of a "naked call," where someone sells a call without owning the underlying stock, which exposes them to potentially unlimited losses if the price rises sharply.

The trade-off is straightforward: you collect the premium as income no matter what, but you cap your upside. If the stock shoots past the strike price, you still only get to sell at the strike price (plus you keep the premium), missing out on the gains above that. If the stock stays flat or falls, the premium cushions your loss a bit but doesn't protect you from a large decline, since you still own the shares.

The nuance that trips people up is timing and assignment. The option can be exercised (called "assignment" from the seller's side) at or before expiration depending on the option's style, and many traders forget that once they sell the call, their shares are effectively "spoken for" up to the strike price — they've traded away unlimited upside for guaranteed income, not the other way around.