Covered call
Owning the underlying and writing a call on it. The premium adds income in a flat market, and any gain above the exercise price is given up in return.
Where you will meet it
Covered call appears in 6 learning outcomes on the CFA syllabus. A few of them:
- Set out the payoffs from a covered call and a protective put
“A covered call pairs a long underlying with a written call: the premium is received and enhances return in flat markets, but any gain above the exercise price is forgone.”
- Build a positioning strategy from forward rates when the manager's rate outlook agrees with what the market implies
“Strategies include buy-and-hold at a target duration; rolling down an upward-sloping curve by holding bonds whose yields fall as they age; repo-financed carry trades that borrow short to hold higher-yielding longer bonds; long futures or receive-fixed swaps as leveraged equivalents; and selling options, such as covered calls, to collect premium.”
- Identify the sources of income and the costs that arise when holding and running an equity portfolio, and explain how each affects performance
“Income comes from dividends, from lending securities to short sellers for a fee, and from ancillary strategies such as writing covered calls or cash-secured puts, which collect option premiums but cap upside or add downside exposure.”
- Explain a covered call: why an investor writes one, how it is built, its payoff and value at expiry, its risks and profit, the most it can gain or lose, and the underlying price at which it breaks even
“A covered call is a long asset plus a short call, used to earn income, sell at a target price or improve an exit.”
See also
Practise it
Practise covered call until it is automatic: questions that explain every wrong option.
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