Covered Call

A covered call is a two-part options trading strategy where an investor, holding a long position in an underlying asset, sells (or "writes") a call option on that same asset. The strategy is termed "covered" because the seller's obligation to deliver the shares if the option is exercised is secured by the shares they already own in their portfolio. This generates premium income for the seller, which provides a hedge against a modest price decline in the underlying asset. The primary goal is to earn income from the option premium while potentially being obligated to sell the asset at the option's strike price.

The mechanics involve selling a call option with a specific expiration date and strike price above the asset's current market price. If the asset's price remains below the strike price at expiration, the option expires worthless, and the seller keeps the full premium and their shares. This premium enhances the overall return on the held asset. However, the strategy caps the upside potential; if the asset's price rises significantly above the strike price, the seller is obligated to sell their shares at that lower strike price, forgoing additional profits. The maximum profit is the premium received plus the difference between the strike price and the original purchase price of the asset.

Covered calls are considered a moderately conservative strategy, often used by investors with a neutral to slightly bullish outlook on an asset they intend to hold. It is a common tactic for generating income in a flat or slowly rising market. Key risks include opportunity cost from capped gains during a rally and the standard risk of the underlying asset's price declining, though the premium provides a partial buffer. The strategy's success is measured against its breakeven point, calculated as the original purchase price of the asset minus the premium received.

A covered call is an options strategy where an investor who owns an underlying asset sells a call option on that same asset to another party. The seller, or "writer," receives a premium from the buyer in exchange for granting the right, but not the obligation, to purchase the asset at a specified strike price before a set expiration date. This strategy is termed "covered" because the seller's obligation to deliver the shares is secured, or covered, by their existing long position in the underlying asset, unlike a naked call which carries unlimited risk.

The primary mechanics involve two simultaneous positions: a long position in the asset (e.g., owning 100 shares of a stock) and a short position in a call option contract (representing 100 shares). The investor's goal is to earn the option premium as income, which provides a modest hedge against a small decline in the asset's price. However, the trade-off is capped upside potential; if the asset's price rises significantly above the strike price, the option will likely be exercised, and the investor must sell the asset at the strike, missing out on further gains above that level.

Key outcomes are determined by the asset's price at expiration relative to the strike price. If the price stays at or below the strike, the option expires worthless, and the investor keeps both the premium and the underlying asset. If the price rises above the strike, the option is typically exercised. The investor must sell the asset at the strike price but still profits from the asset's appreciation to that point plus the initial premium received. This makes covered calls a popular strategy in sideways or moderately bullish markets for generating additional yield on a portfolio.

In the context of DeFi and crypto, covered calls are implemented through decentralized options protocols like Opyn, Lyra, or Dopex. Here, a user can deposit an asset like ETH as collateral and mint a call option token (oToken) to sell on a marketplace. The mechanics are analogous to traditional finance but are executed via smart contracts, with premiums often paid in the protocol's native token or stablecoins, adding a layer of yield generation to crypto holdings.

A covered call is an options strategy where an investor who owns an underlying asset (e.g., 100 shares of a stock) sells a call option on that same asset to another party. The strategy is 'covered' because the seller owns the shares required to fulfill the obligation if the option is exercised. This transaction generates immediate income from the option premium received, but it caps the seller's potential upside if the asset's price rises above the option's strike price.

The risk profile of a covered call is defined by its limited upside and continued exposure to downside risk. The maximum profit is achieved if the underlying asset's price is at or above the strike price at expiration, calculated as the premium received plus the gain from the asset's rise to the strike. Conversely, the seller retains full downside risk on the asset itself; if its price falls, losses on the asset are only partially offset by the premium collected. This makes it a moderately bullish or neutral strategy.

In practice, this strategy is often used for income generation in sideways or slowly appreciating markets. For example, an investor holding Bitcoin might sell a monthly call option at a price 10% above the current market value. If Bitcoin's price stays flat or rises modestly, the investor keeps the premium. If it surges past the strike, the investor's Bitcoin is sold (called away) at the strike price, forfeiting further gains. The reward is predictable and capped, while the risk mirrors that of simply holding the asset, minus the premium buffer.