Covered Call Option
A Call Option is a contract in which the purchaser has the right to buy a quantity of a security at a specified price (called the strike
price) for a fixed period of time (until its expiration). Most traded options are listed on exchanges and the exchange acts as a
clearing agent to ensure that the terms of the option contract are upheld.
For a call option seller (called the writer), it represents an obligation to sell the underlying security at the strike price if the option is
exercised. The call option writer is paid cash (called a premium) for granting the purchaser the right to buy the underlying security.
Selling call options on the underlying securities that are owned in a portfolio (called covered call writing) is a strategy that is
designed to increase portfolio income or provide partial protection against the decline in the value of the securities that are owned in
Using the covered call option strategy, the writer earns a cash premium writing calls while at the same time receives all benefits of
the underlying stock ownership (such as dividends and voting rights) until he is assigned an exercise notice on the written call and
is obligated to sell his shares.
The trade-off for writing the call option and receiving premium is that the writer agrees to limit the potential appreciation that is
received from the underlying shares to the strike price specified in the option contract.
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