Covered Call

A strategy where the owner of 100 shares sells a call option against that position — collecting premium income while agreeing to sell the shares at the strike price if assigned.

A covered call is the most common options strategy used by individual investors, and it is genuinely conservative: the "covered" means you already own the shares that would need to be delivered if the call is exercised. You aren't taking on naked exposure — you're simply agreeing to sell something you already own at a price you find acceptable.

The mechanics: you own 100 shares, you sell one call contract at a strike above the current price, you collect the premium. Three outcomes at expiration: (1) If the stock stays below the strike, the call expires worthless and you keep the premium — run it again next month. (2) If the stock closes above the strike, your shares are called away at the strike price, and you keep the premium on top — your effective sale price is strike plus premium. (3) If the stock falls sharply, the premium you collected reduces but does not eliminate the loss.

The tradeoff is explicit: you cap your upside at the strike price in exchange for the premium collected. A covered call is optimized for a flat-to-moderately-rising environment. It underperforms in a strong rally (you miss gains above the strike) but outperforms in a flat or slightly falling market (premium income partially or fully offsets the drift). Many income ETFs — QYLD, JEPI, XYLD — use this strategy at scale to generate the high distributions they advertise.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.