Options
Covered Call Definition
Covered call definition for Series 7 options questions, including income use, max gain logic, common traps, and options practice links.
Know the term before it appears in a question.
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Definition snapshot
Exam trap notes
Practice links
Definition snapshot
Covered Call
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
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
See the rule in a prompt.
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
What candidates confuse
- 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.
Exam depth
How to study this page
What the exam is testing
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.Why candidates miss it
Calling the position bullish without recognizing the capped upside.Exam trap
Forgetting assignment risk when the short call is in the money.Memory trick
Before answering, say the tested rule in one sentence, then point to the exact clue in the stem. For covered call, the clue usually appears before the answer choices start to look tempting.Related concepts
Concept map
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