the term covered call refers to a financial transaction in which the investor selling call options owns an equivalent amount of the underlying security to execute this an investor who holds a long position in an asset then writes sells call options on that same asset to generate an income stream the investor s long position in the asset is the cover because it means the seller can deliver the shares if the buyer of the call option chooses to exercise 
investopedia alex dos diazunderstanding covered callscovered calls are a neutral strategy meaning the investor only expects a minor increase or decrease in the underlying stock price for the life of the written call option this strategy is often employed when an investor has a short term neutral view of the asset and for this reason holds the asset long and simultaneously has a short position via the option to generate income from the option premium 1simply put if an investor intends to hold the underlying stock for a long time but does not expect an appreciable price increase in the near term then they can generate income premiums for their account while they wait out the lull a covered call serves as a short term hedge on a long stock position and allows investors to earn income via the premium received for writing the option however the investor forfeits stock gains if the price moves above the option s strike price they are also obligated to provide 100 shares at the strike price for each contract written if the buyer chooses to exercise the option 2maximum profit and maximum lossthe maximum profit of a covered call is equivalent to the premium received for the options sold plus the potential upside in the stock between the current price and the strike price thus if the call is written with a strike price of 100 on a stock trading at 90 and the writer receives a premium of 1 00 per stock the maximum potential profit per stock is the 1 00 premium plus a 10 appreciation of the stock or a total of 1100 the maximum loss on the other hand is equivalent to the purchase price of the underlying stock less the premium received this is because the stock could potentially drop to zero in which case all you would receive is the premium for the options sold 1if the investor simultaneously buys a stock and writes call options against that position it is known as a buy write transaction advantages and disadvantages of covered callsan options writer can earn money by selling a covered call but they lose the potential profits if the call goes into the money however the writer must be able to produce 100 shares for each contract if the call expires in the money if they do not have enough shares they must buy them on the open market causing them to lose even more money covering calls can limit the maximum losses from an options transaction but it also limits the possible profits this makes them a useful strategy for institutional funds and traders because it allows them to quantify their maximum losses before entering into a position a covered call strategy isn t useful for very bullish or very bearish investors 3 very bullish investors are typically better off not writing the option and just holding the stock the option caps the profit on the stock which could reduce the overall profit of the trade if the stock price spikes covered options limit the risks and potential downsides of an options contract options writers can earn a reliable premium from a small price increase options writers must be able to produce 100 shares for each call option that expires in the money if an investor is very bullish on a security they can make more money from uncovered calls or buying the underlying security 