Introduction: What You Will Learn (1 of 4)
- A covered call involves writing call options while simultaneously owning an equivalent number of shares of underlying stock.
- Benefits of the covered call strategy include increased income from stock ownership and decreased financial risk of holding underlying shares.
- The principal disadvantage of the covered call strategy comes from a limited profit potential if the underlying stock rises sharply in price.
- Covered call investors can enjoy the rights associated with stock ownership (i.e., dividends and voting rights) unless they are assigned on the written call(s) and are obligated to sell their underlying stock.
- The covered call strategy can be tailored to either a speculative or defensive posture on the underlying stock.
For educational purposes, throughout this class on covered calls we will be posing a hypothetical option strategy with hypothetical options and premium amounts. It is assumed that the options used as examples are regular equity options; i.e., they are unadjusted contracts with standard units of trade (100 underlying shares).
Further, any discussions or calculations of potential profit and/or loss amounts in this class do not include the impact of commissions, transaction costs, margin rates, or taxes. All investors should consult with their broker, financial advisor, or tax consultant before employing this or any other equity option strategy.