What are Covered Calls: Definition, How They Work, and Example Strategies for Investors

Jakarta, Pintu News – In an investment world full of various strategies, covered calls offer an attractive approach for investors seeking additional income without significantly increasing risk.

This strategy involves selling call options while holding the stock that the option is based on.

As such, investors can generate income from the option premium received, while still having the potential to profit from the shares held.

Check out the full information in this article!

What is Covered Call?

A covered call is a strategy where the owner of a stock sells a call option on the stock they own. This strategy is typically used when investors want to maintain their long-term stock holdings and do not expect a significant price increase in the near future.

By selling a call option, the investor receives a premium which is an additional source of income, while the risk is limited to the possibility of having to surrender the shares if the share price exceeds the strike price of the option.

A covered call strategy is considered a neutral strategy, where the investor does not expect major changes in the stock price during the option period. It is suitable for situations where investors have a neutral or slightly positive view of the stocks they own.

By accepting option premiums, investors can reduce potential losses and increase their investment income in the short term.

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Advantages and Disadvantages of Covered Call

One of the main advantages of the covered call strategy is the ability to generate reliable premium income. The premium received from selling call options adds to investment income without the need to sell shares. However, this advantage comes with the limitation that the potential gains from the stock are limited if the stock price rises beyond the strike price of the option.

On the other hand, the downside of this strategy is also limited. If the stock price drops, the loss the investor faces will be reduced by the amount of premium received.

However, this strategy is not suitable for extremely bullish investors, as they will miss out on potentially larger gains if the stock price increases significantly. Therefore, it is important to understand market conditions and stock price expectations before implementing a covered call strategy.

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Strategy Alternatives and Adjustments

Besides covered calls, there are other strategies that are similar but offer different dynamics, such as the cash-secured put. This strategy is similar to the covered call but involves selling put options while ensuring cash is available to buy shares if the option is exercised.

Another strategy to consider is the collar strategy, which combines a covered call with a protective put to provide additional protection against falling stock prices.

In practice, investors can also adjust their covered call positions through a process known as “rolling”. Rolling involves closing an existing call option and opening a new call option with different terms. This allows investors to adjust their strategies according to changing market conditions or investment objectives.

Conclusion

Covered calls are a strategy that offers a balance between generating income and limiting risk in an investment portfolio.

While not offering unlimited profit potential like some other strategies, covered calls can be a valuable tool under certain market conditions.

Investors should consider this strategy when they have a neutral or slightly positive view of the stocks they own and are looking for ways to generate additional income.

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Reference

• Investopedia. Covered Calls: How They Work and How to Use Them in Investing. Accessed on July 18, 2025
• Featured Image: Generated by AI