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Covered Call

Trading Term

A covered call would be considered by someone who would like to derive additional income from a long stock position.  A covered call allows the investor to hold a long equity position while simultaneously receiving the premium from selling an equal amount of call options against it. The covered call writer is bullish on the stock’s long-term potential but is willing to forego a stock’s upside above the strike during the life of the option in order to receive the proceeds of the call premium.  The covered call writer benefits from time decay, from a reduction in volatility and if the stock increases its dividend before expiration.  It should be noted that the combined position has a similar profile to that of a short put.  The covered call writer remains exposed to any downside in the underlying shares, meaning his loss potential is substantial.

 

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