The Covered Call
A covered call is a options trading strategy in which an investor holds a long position in an underlying stock and simultaneously sells a call option on the same stock. By selling the call option, the investor earns additional income from the option premium, while still retaining the potential for appreciation in the underlying stock. If the stock price rises, the investor can sell their shares at a higher price, and if the stock price falls, the option will expire worthless, allowing the investor to keep their shares.
The "covered" aspect of the covered call refers to the fact that the investor holds a long position in the underlying stock, which means they have the underlying asset to sell if the option is exercised. This eliminates the risk of naked option writing, where the investor does not hold the underlying asset and is exposed to potentially large losses if the stock price rises significantly.
The covered call is a conservative strategy that can provide income in a flat or slightly rising stock market, but it also limits the potential for capital gains from the underlying stock. As such, it is a popular strategy among income-seeking investors who want to generate additional income from their stock portfolio while still retaining some upside potential.
The "covered" aspect of the covered call refers to the fact that the investor holds a long position in the underlying stock, which means they have the underlying asset to sell if the option is exercised. This eliminates the risk of naked option writing, where the investor does not hold the underlying asset and is exposed to potentially large losses if the stock price rises significantly.
The covered call is a conservative strategy that can provide income in a flat or slightly rising stock market, but it also limits the potential for capital gains from the underlying stock. As such, it is a popular strategy among income-seeking investors who want to generate additional income from their stock portfolio while still retaining some upside potential.
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