What is a covered call? A covered call is the combination of a stock position, which is owned, and a call option, which is sold. Technically this is commonly referred to as being ‘long’ the stock position and ‘short' the call option.
What is a call option? A call option is a ‘right’ to buy a stock, (known as the underlying stock), at a specified price, on or before a specified date. The specified price is known as the strike price and the specified date is known as the expiration month or date. Call options always expire on the third Friday of the expiration month. Call options are sold in units called contracts, where each contract represents the right to buy 100 shares (called an even lot) of the underlying stock. For example, the owner or buyer of one ABZ June $110 call option has the right to purchase 100 shares of ABC at $110 until the June expiration. In this example, the 'ABC' is the ticker symbol of the stock, 'June' is the expiration month and $110 is the $110 strike price.
It is also important to understand the owner of the call option has 'the right to buy', but is not obligated to do so. When the price of a stock is above the call option strike price, there is no requirement for the owner of the option to exercise their 'right to buy'. It is also important to realize when expiration Friday arrives; an option will be exercised if the stock is trading above the strike price
What is Systematic Covered Writing? This is a process whereby the investor purchases multiple stock positions and then sells call options against these positions in one systematic transaction. This step is just the beginning of a process, or system, of strategies, with the basic goal being to generate cash through the use of call options. Additional profit may or may not be generated through the sale of stock positions.
What is a covered writer? An investor that writes (sells) covered calls is referred to as a covered writer.
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IMPORTANT - There are many investors that buy and sell stock, just as there are many that buy and sell options. Options involve risk and are not suitable for all investors. One of the additional risks to owning options is the fact that they expire. If the investor is 'wrong' on the underlying stock's price movement they can loose 100% of the investment. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Recall that the information on this website is provided for educational and/or informational purposes only and should not be considered otherwise. No example or statement within this material should be construed as a recommendation to buy or sell a security, be it a stock or call option. Having said that, it is also important to know that Systematic Covered Writing does not suggest that you own options!
SYSTEMATIC COVERED WRITING
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Revised:
02/05/07