What is a covered call and how does it work?

A covered call is an options strategy where you sell a call option on stock you already own (at least 100 shares per contract). You earn a premium for selling the option, but agree to sell your shares at the strike price if the option is exercised by the purchaser you sell the call contract to.

If you want to remove the risk before expiration or exercise, you can buy back the option on the open market (“buy to close”). This ends your obligation.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Options Disclosure Document. Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.