Practical Considerations in Picking the Covered Call

Michael C. Thomsett

Most traders who take a look at options have heard of the very popular strategy, the covered call. This is a very safe options strategy because it produces a profit better than just owning stock in most of the possible outcomes.

A “covered” call exists when you own 100 shares of the underlying stock and sell a call. Going short on a call is a high-risk idea if you don’t own the stock (a strategy called the uncovered, or naked call write). In the event a naked call is exercised, you have to come up with the difference between the call’s strike and the current market value. For example, if you write a naked call with a strike of 50 and the stock rises to $62 per share at expiration, ...