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Covered call

As explained in Investing for Programmers

A covered call is an options strategy that sells a call option against an asset already owned by the strategist.

A covered call sells a call option against shares already owned. The strategy seeks premium income from a stock expected to remain below a chosen strike price, while accepting a capped upside if the stock rallies. section 7.4.1

A $100 stock with a $110 strike

Suppose you own 100 shares at $100 and expect reliable dividends but little movement above $110. Selling a $110 call earns a premium. If the stock stays below $110, you keep the shares and premium; if it rises to $120, you may have to sell at $110, limiting upside and potentially losing more than the premium offsets. section 7.4.1

Check these trade-offs before using the strategy:

  • Premium income provides a limited cushion, not protection from a large decline in the owned shares. section 7.4.1
  • Expiration determines when the option ends; exercise timing also depends on whether the option is European- or American-style. section 7.4.1

How Investing for Programmers covers it

How deep it goes
Defines the payoff with one numerical example and notes expiration and exercise styles, but stops short of implementation or valuation mechanics.
Examples
Uses 100 shares bought at $100, a $110 call, a premium, and a rally to $120.
What it assumes
Assumes ownership of shares and basic familiarity with calls, premiums, strike prices, and expiration.
What you can do after
Evaluate premium income against capped upside and potential losses when the owned stock declines or rallies sharply.
How it connects
Connects covered calls to derivatives, call options, premiums, strike prices, dividends, expiration dates, and exercise styles.
Cover of Investing for Programmers
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