Writing Covered Calls

Covered Calls

Selling or Writing Covered Calls Options

How Do You Write Covered Calls?

How Do You Make Money Writing Covered Calls?

Related Terms:

What does "Writing Covered Calls" mean?

"Writing covered call options" (also known as "selling covered call options") is very profitable and popular way of trading call options in a sideways or down market. Writing covered calls is often the "smart money" way of trading options. It is smart for a variety of ways, but first let's explain the definition and provide some examples of writing covered calls.

If you understand that call options give the holder the right to buy a stock at a certain price by a certain date, it's time to think about the other side of that transaction. In order for someone to "buy" a call option, someone has to have "sold" the call option to them. The person buying the call option hopes the price of the underlying stock will go up, and the person who sold that person the call option is hoping the price will stay the same or go down.

If the owner of the call option is going to exercise it and buy the stock at the strike price, they have to be buying it from someone, right? That person that they are buying it from is, of course, selling the stock to them at the strike price. In the transaction where a buyer buys a call, the seller of the call is said to have "sold a call" or "written a call." These terms "writing" and "selling" are used interchangeably.

The person that bought the call option hopes the stock will go up and has an expected payoff that looks like this:

Selling Covered Calls

selling covered calls

The person that sold or wrote that call option, however, can have two different expected outcomes depending on whether or not he owns the stock. If the seller doesn't own the underlying stock then he is said to be selling naked call options or writing naked calls. But if the seller owns the underlying stock, then he is said to be selling covered call options or writing covered calls.

Naked-calls writing covered calls

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Options Trading

Options Resources and Links

Options trade on the Chicago Board of Options Exchange and the prices are reported by the Option Pricing Reporting Authority (OPRA):