Covered Call Writing
The covered call is a strategy in options trading whereby a call option is sold against a holding of the underlying stock.
The writer of a covered call is typically slightly bullish or neutral toward the underlying security. The covered call writer's profit potential is limited as he had, in return for the premium, given up the chance to fully profit from a substantial rise in the price of the underlying asset.
Additional Profits from Premiums
The common objective of covered call writing is to earn additional profits by collecting the premiums for writing the call options.
The investor gets to earn a premium writing calls while at the same time appreciate all benefits of underlying stock ownership, such as dividends and voting rights, unless he is assigned an exercise notice on the written call and is obligated to sell his shares.
Writing Calls to Provide Downside Protection
By writing calls, one can make use of the premiums earned to lower the cost of stock acquisition.
The amount of downside protection desired also influences the call writer's decision on whether to write in-the-money calls or to write out-of-the-money calls.
Collars
As the covered call writer is exposed to substantial downside risk should the stock price of the underlying plunges, collars are sometimes created to reduce this risk by simultaneously purchasing a put option.
Uncovered (Naked) Call Writing
An alternative but highly risky call writing strategy whereby the call writer does not own the obligated shares of the underlying stock is known as naked call writing.