Covered calls are a popular income strategy. But, they are a risky strategy and may not be the best option for many investors.
Covered calls are a strategy that involves buying and holding a stock and selling, or writing, call options on that stock. Since each options contract covers 100 shares of a stock, this strategy requires owning at least 100 shares and using multiples of 100 shares when trading.
Writing a call is a strategy used to generate income. Selling the option generates immediate income from the stock. If the option expires worthless, the investor keeps the premium as the profit on the trade. The investor also collects any dividends since they own the stock.
Calls, like all options, have an expiration date and an exercise price. If the stock is trading above the exercise at expiration, the call will be exercised and the investor who wrote the contract will have to deliver the shares at the agreed upon exercise price.
When a trader writes, or sells, a call, they are obligated to sell the shares if the call option is exercised.