How does covered call work

Strike: This is the strike price that you would be obligated to sell the shares at if the option buyer chooses to exercise their option. Price: This is the price that the option has been selling for recently.

This is basically how much the option buyer pays the option seller for the option. A market maker agrees to pay you this amount to buy the option from you. Ask: This is what an option buyer will pay the market maker to get that option from him. Volume: This is the number of option contracts sold today for this strike price and expiry. Open Interest: This is the number of existing options for this strike price and expiration. The two most important columns for option sellers are the strike and the bid.

As you can see in the picture, there are all sorts of options at different strike prices that pay different amounts of premiums. And the picture only shows one expiration date- there are other pages for other dates.

Click here for a bigger image. Each option is for shares. Here are your inputs, as well as the potential outputs of what can occur, courtesy of OptionWeaver :. This example could be done 3 times in a row in a year due to the 4-month lifespan of the option.

In fact, that would be a 4. As you sell these covered calls, your dividend yield will be around 2. Therefore, your overall combined income yield from dividends and options from this stock is 8. The information in this site does not contain and should not be construed as containing investment advice or an investment recommendation, or an offer of or solicitation for transaction in any financial instrument.

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Your Practice. Popular Courses. Table of Contents Expand. Options Basics. How a Covered Call Can Help. When to Use a Covered Call. What to Do at Expiration. Risks of Covered Call Writing.

The Bottom Line. Key Takeaways A covered call involves selling an upside call option representing the exact amount of a pre-existing long position in some asset or stock.

The writer of the call earns in the options premium, enhancing returns when the underlying is in a sideways market. A covered call will, however, limit upside potential, and does not protect against the portfolio losing value in a down market.

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Related Terms Ratio Call Write Definition A ratio call write is an options strategy where more call options are written than the amount of underlying shares owned. What Is a Stock Option? A stock option gives an investor the right, but not the obligation, to buy or sell a stock at an agreed-upon price and date. What Is a Covered Combination?

A covered combination is an options strategy that involves the simultaneous sale of an out-of-the-money call and put. Options Contract Definition An options contract gives the holder the right to buy or sell an underlying security at a predetermined price, known as the strike price. Put Option Definition A put option grants the right to the owner to sell some amount of the underlying security at a specified price, on or before the option expires.

Forward Start Option Definition A forward start option is an exotic option that is bought and paid for now but becomes active later with a strike price determined at that time. Investopedia is part of the Dotdash publishing family.