When you write a covered call, you write (sell) an option corresponding to stock shares you hold.  You use your stock shares as a guarantee to effectively “cover” your position as an option writer.  In the event that you are “assigned” on an option you wrote, you will be required to deliver the corresponding shares by the OCC.  Because you owned the shares to begin with, you do not have to go out on the open market and buy them. That’s why you are covered.

The premium you collect from selling the option is immediate money in your pocket.  You are still exposed to a downside move in the price of the stock, but your break-even point on the shares is more favorable because you collected a premium for selling the option.

If your shares are called away (a likely event if the option is in-the-money near expiration) than you often lock in a modest profit on the strategy.

The covered call strategy is a conservative option trading strategy -- one of the few not driven by pure speculation. 

At the end of the day, a covered-call trader must be willing to forego upside profit potential in exchange for a higher probability of success on the trade.  Like other options strategies, however, you can select both low-risk or high-risk variations of the
strategy. Try to focus on the low-risk versions, first.

Skilled covered call writers expect option to be exercised and the shares called away. They look at a metric called the “if-called return” and write calls with higher Delta numbers. 

Liz, one of the three Zecco Zirens, presents the fundamentals of the Covered Call.  Feel free to smoke a cigarette after viewing this.

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