Skip to content

Knowledge

Okoora infrastructure Glossary

Understand core FX, risk, and execution concepts used across Okoora’s infrastructure.

Covered Call

What Is A Covered Call?

A Covered Call is an options strategy where an investor holds a long position in a stock and simultaneously sells a call option on that stock to generate income. The strategy limits upside potential but provides immediate premium income and partial downside protection.

How It Works

This strategy involves owning the underlying asset—typically 100 shares of stock—and selling a call option with a strike price typically at or above the current price. The call premium is collected upfront. If the stock remains below the strike price, the option expires worthless, and the investor retains both the stock and the premium. If the stock rises above the strike, the investor is obligated to sell the stock at the strike price, realizing limited upside.

Example

An investor owns 500 shares of ABC Corp purchased at $48 per share. ABC is now trading at $50. The investor sells five call options (each covering 100 shares) with a $52 strike, expiring in 30 days, and collects $1.50 per share ($750 total). If ABC stays below $52, the options expire worthless, and the investor keeps the premium. If ABC rises to $55, the investor must sell at $52 but still earns a total gain of $1,750 (stock gain + premium). If ABC drops to $45, the investor loses on the stock but offsets part of that loss with the $750 premium.

Key Concepts / Components

  • Strike Price: The predetermined price at which the stock may be called away. Closer strikes yield higher premiums but more assignment risk.
  • Option Premium: The income received for writing the call, offering limited downside buffer.
  • Assignment: If the stock trades above the strike at expiration, the option is exercised and shares are sold at the strike price.
  • Expiration Date: When the call expires. Shorter expiries are often used to maximize time decay and income.
  • Rolling: Closing the existing position early and opening a new one with a different strike or expiry to extend the strategy.

When It’s Used

Covered Calls are best used in neutral to moderately bullish markets. They’re ideal for income-focused investors looking to boost returns on stock holdings while accepting capped gains. The strategy is often employed in “buy-write” portfolios, retirement accounts, and periods of high implied volatility.

Related Terms

  • Call Option
  • Strike Price
  • Option Premium
  • Assignment (Options)
  • Buy-Write Strategy
  • Naked Call
  • Time Decay (Theta)
  • Rolling Options
  • Implied Volatility

References

Cash Flow HedgeCovered Interest ArbitrageCommodity RiskCall Option