Covered call definition

A covered call is when a trader sells (or writes) call options in an asset that they currently have a long position on. They are also known as buy-writes.

Selling a covered call enables you to make a profit out of an asset that you own, but only if its price doesn’t exceed the strike price of the option you’ve sold before it expires. In this instance, the option will become worthless and you will collect the premium as profit.

If the asset’s price does increase beyond the strike price, then profits are limited to the difference between the strike price and the price at which you bought the asset. At this point, it is possible to buy an option with the same strike price and expiration in order to reduce the amount of potential profit you have lost.

Selling an option in an asset you don’t own is referred to as an uncovered call. 

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