What is a Covered Call? - Options Trading
What is a Covered Call? - Options Trading Strategies
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A covered call (oftenalso called a "buy-write" strategy) is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying security, such as shares of a stock or other securities. According to put call parity, the strategy has the same payoffs as being short a put option. (See my video on put call parity)
The long position in the underlying instrument is said to provide the "cover" as the shares can be delivered to the buyer of the call if the buyer decides to exercise.
Writing (or selling) a call generates income in the form of the premium received from the option buyer. And if the stock price remains stable or increases, then the writer will be able to keep this income as a profit, even though the profit may have been higher if no call were written. The risk of stock ownership is not eliminated. If the stock price declines, then the overall position will lose money.
Since in equilibrium the payoffs on the covered call position is the same as a short put position, the price (or premium) should be the same as the premium of the short put or naked put.
Watch Patrick's Other Videos On This Topic
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