All option guides
What is a covered call?
Understand how owning stock and selling a call creates income, a capped upside, and assignment exposure
Prepared by Mark · Primary sources below
Direct answer
A covered call combines long shares with a short call on those shares. The premium received can provide income and a small cushion against a decline, but it does not remove the stock's downside risk. In return for that premium, upside above the call's strike is generally given up and the shares can be called away if the short call is assigned
The position has two parts
The investor owns the underlying shares and sells one call contract against the corresponding number of shares. The call buyer has the right to buy those shares at the strike price before or at expiration, subject to the contract's exercise terms
The premium changes, but does not erase, the tradeoff
The premium is received when the call is sold. It can offset a limited amount of a share-price decline, but the stock can still lose considerably in value. If the stock rises beyond the strike, the short call limits additional upside from the shares
Assignment is part of the structure
A short call can be assigned before expiration for American-style equity options. Assignment risk often deserves closer attention as a call becomes in the money, approaches expiration, or is near an ex-dividend date. Broker procedures and contract details matter
Sources and further reading
Start from the contract you are considering
Choose an option and target so the analysis can separate the stock, time, and volatility conditions behind the outcome
Analyze my option