Covered Call

1. Definition

A Covered Call (or Buy-Write) is an income-generating strategy where an investor holds a long position in an asset (stock) and writes (sells) call options on that same asset. It is called "covered" because the investor owns the shares required to fulfill the contract if the option is exercised.

2. Market View

• Neutral to Moderately Bullish: Best suited for markets where the stock price is expected to remain flat or rise slowly. It is not ideal for strong bull markets (upside is limited) or crash scenarios (downside risk remains).

3. Setup

• Action: Buy 100 Shares of Stock + Sell 1 Call Option against it.
• Goal: To collect the option premium as immediate income.

4. Mechanism

4.1. If Stock Stays Flat or Drops Slightly

The investor keeps the stock and keeps the premium received from selling the call. The premium acts as a buffer, offsetting small declines in the stock price and boosting overall returns in a stagnant market.

4.2. If Stock Skyrockets

If the share price rises above the strike price, the stock will be "called away" (sold) at the strike price. * Result: The investor keeps the premium and the capital gains up to the strike price, but misses out on any further gains. The profit potential is capped.

5. Pros & Cons

• Pros: Generates regular income (yield enhancement) in addition to dividends. It lowers the break-even price of the stock holding and reduces volatility. Popularized by ETFs like JEPI.
• Cons: Capped Upside. Investors forfeit the chance to make large profits if the stock price makes a massive run. It also offers only limited downside protection (only up to the amount of the premium).