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Finance Dictionary and Glossary of Investment Terms
Covered call
Definition 1.
A short call option position in which the writer owns the number of shares of the underlying stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the stock does not have to be bought at the market price, if the holder of that option decides to exercise it.
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Definition 2.
Having a long position in an asset combined with a short position in a call option on the same underlying asset.
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Definition 3.
The selling of a call option while simultaneously holding an equivalent position in the underlier. This is an attempt to take advantage of a neutral or declining stock. If the option expires unexercised, the writer keeps the premium. If the holder exercises the option, the stock must be delivered, but, because the writer already owns the stock, risk is limited. This is the opposite of an uncovered call, when the writer sells a call for a stock that he/she does not already own, a dangerous strategy with unlimited risk.
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Definition 4.
A form of option writing or selling in which the seller owns a quantity of the underlying security equivalent to the number of shares represented by the option contracts sold. A covered call position is less risky than an outright long stock position and is equivalent in its profit/loss profile to selling naked puts.
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