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Chapter 5. Options as Cash Generators > The Covered Call Concept

The Covered Call Concept

No strategy is completely risk-free, not even owning stock in well-managed, strongly capitalized companies. But in the case of a covered call, we seek to enhance our profits without incurring added market risk, and this is both practical and inevitable. For many investors, the lost opportunity risk is worth the additional income that covered call strategies generate. (Lost opportunity risk is discussed later in this chapter.)

A covered call strategy has two elements. First is the ownership of 100 shares of stock for each option to be covered; second is the short position in the call option. If you own 100 shares, you sell one call to achieve the one-to-one “covered” status. The call grants the right to the buyer on the other side of the transaction to buy your 100 shares (to call them away) at the set strike price at any time from the date of sale until expiration. As long as the current price of stock is below the strike price, the call should not be exercised.


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