In covered call writing you sell a call option while simultaneously owning the obligated number of shares of underlying stock. As a writer, you should de mildly bullish, or at least neutral, about the underlying stock. By writing a call option against the stock, you always decrease the risk of owning the stock. It may even be possible to profit from a covered write if the stock declines. However, the covered call writer does limit his profit potential and therefore may not fully participate in a strong upward move in the price of the underlying stock.

Let's consider the following example:

Figure: Sell Covered Call Strategies Vs. Stock Buying Example

The table below summarizes the results at expiration.

Figure: Sell Covered Call Strategies Vs. Stock Buying Example – Summarized Results

“Sell covered call” strategies are less risky and less profitable compared to ‘buy stock’ strategy. In our example, such strategies can be used when the stock price is between $81 (break-even for ‘less bullish’) and $100 (intersection of ‘buy stock’ and ‘very bullish’ strategies). Depending on the amount risk you are willing to take for more profit, you can chose between options with different strikes. ‘Buy call’ strategy is preferable when the stock price goes above $100. ‘Sell covered call’ strategy is a good profit-making instrument when you anticipate slight changes in the stock price either up or down.

Figure: Sell Covered Call Strategies Vs. Stock Buying Example – Profitability

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