Options & derivatives
Covered call
Selling a call option on shares you already own, to collect premium in exchange for capping your upside.
How it works
You keep the premium whatever happens. If the share rises above the strike, your shares are called away and you forgo everything above it.
It is often marketed as income generation. It is more accurately described as selling your upside for a fee.
Where it misleads people
The strategy has the same downside as owning the shares, with the upside removed. Repeated over time it tends to keep the losers and sell the winners, which is the opposite of what compounds.
Worked example
Owning shares at $100 and selling a $110 call for $2 gives $2 of income and caps the outcome at $112 no matter how far the shares run.
Related terms
- Call optionThe right to buy an asset at a fixed price before a set date.
- AssignmentBeing required to fulfil an option you sold, because the buyer exercised it.
- PremiumThe price paid for an option, made up of intrinsic value plus time value.
- SkewnessWhether a return distribution leans towards large gains or large losses.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.