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Selling Call Options
Covered Call Writing
Writing covered calls is one of the more common or conservative strategies for using
options, and it’s where many investors start when they first use options. The
benefits that can be derived from writing a covered call - selling the option to buy an
underlying stock that you already own - are increased earnings through the option premium,
locked-in profit if the option is exercised, and some price protection in the event that
the stock price should decline.
Uncovered Call Writing
In uncovered or naked call writing, you are selling the option to buy a stock that you
don’t yet own. This strategy involves much greater risk than the covered call. You
can derive the same earnings benefit from the premium; however, should the stock price
increase above the strike price, you are obligated to buy enough stock at the higher
market price to cover the sale of stock from the exercised option. The potential for loss
is unlimited, but uncovered calls can be profitable to the extent of the premium earned,
when stock prices are declining or at least remain the same.
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