What are covered calls?
A "call" is an option contract
that gives the owner the right to buy
the underlying security at a specified
price (its strike price) for a certain,
fixed period of time (until its expiration).
For the writer of a call option, the
contract represents an obligation to
sell the underlying stock if the option
is assigned.
The covered call is a strategy in which
an investor writes a call option contract
while at the same time owning an equivalent
number of shares of the underlying stock.
If this stock is purchased simultaneously
with writing the call contract, the
strategy is commonly referred to as
a "buy-write." If the shares
are already held from a previous purchase,
it is commonly referred to an "overwrite."
In either case, the stock is generally
held in the same brokerage
account from which the investor writes
the call, and fully collateralizes,
or "covers," the obligation
conveyed by writing a call option contract.
This strategy is the most basic and
most widely used strategy combining
the flexibility of listed options with
stock ownership.
|
