<p>A covered call is an options strategy in which an investor sells (writes) a <a href="/NewSite/encyclopedia/call-option/" class="ency-link">call option</a> on a stock they already own. By holding the underlying shares, the seller “covers” the obligation to deliver the stock if the option is exercised, reducing the risk associated with naked call writing.</p>

<h2>How It Works</h2>
<p>The investor buys or already holds a specific number of shares, typically in increments of 100 to match one options contract. They then sell a call option with a chosen strike price and expiration date, receiving a premium upfront. If the stock price stays below the strike at expiration, the option expires worthless and the investor keeps both the premium and the shares. If the stock rises above the strike, the option may be exercised; the investor must sell the shares at the strike price, but still retains the premium, effectively capping upside while generating income.</p>

<h2>Why It Matters</h2>
<p>Covered calls are popular among income‑focused investors who want to enhance returns on existing stock positions. For example, an investor holding 1,000 shares of XYZ Corp. at $50 per share could sell 10 call contracts with a $55 strike price expiring in one month, collecting a $200 premium ($0.20 per share). If XYZ remains below $55, the investor earns the $200 premium as extra yield. If XYZ climbs above $55, the shares are sold at $55, locking in a $5 per share gain plus the premium, which can be attractive in sideways or moderately bullish markets. The strategy also provides a modest hedge against small declines, as the premium offsets part of any loss in the stock’s value.</p>