Covered Call

A covered call is an options trade where a trader sells a call option against 100 shares of stock they already own, per contract, collecting a premium in exchange for capping their upside at the strike price. It's called "covered" because the trader already holds the shares needed to deliver if assigned — unlike a naked call, which carries open-ended risk since the seller would have to buy shares on the open market to deliver them. If the stock stays below the strike, the call expires worthless and the trader keeps both the shares and the premium. If the stock rises above the strike, the shares are sold at that strike, and the trader keeps the premium plus any gain up to the strike, but nothing beyond it. A covered call is the second half of the wheel strategy, and its real trade-off is capped upside in exchange for premium income — the premium collected offers only limited protection if the stock falls significantly.