Covered Call Definition

Definition

A covered call combines a long stock position with a short call on the same stock. The stock position covers the obligation to deliver shares if assigned.

Why it matters on the Series 7

Covered calls are tested as an income strategy for a customer willing to sell stock at the strike price. The trade sacrifices upside above the strike in exchange for premium income.

Example

A customer owns 100 shares at 50 and writes one 55 call for 3. The customer keeps the premium but may have to sell the shares at 55 if assigned.

Common mistakes

• Calling the position bullish without recognizing the capped upside.
• Forgetting assignment risk when the short call is in the money.
• Using naked-call risk rules even though the stock position covers delivery.