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A covered call is a short call option which is backed -- or covered -- by sufficient pre-purchased shares of the underlying stock. An investor's risk is limited when selling (or writing) a covered called since the investor already owns sufficient stock to cover the option if the covered call is exercised. By selling a covered call an investor is attempting to capitalize on a neutral or declining price in the underlying stock. When a covered call expires without being exercised (as would be the case in a declining or neutral market), the investor keeps the premium generated by selling the covered call. Selling (writing) a covered call is considered so safe that covered call writing is permitted in most self-directed IRA accounts. The oposite of a covered call is a naked call, where a call is written without pre-purchased stock shares to cover the call if it is exercised. |
