Stock Options & Covered Calls: A Simple Breakdown
Options are contracts that give you the right—but not the obligation—to buy (call) or sell (put) a stock at a fixed price by a certain date. They’re flexible, low-cost tools used for speculation, hedging, and income—but they carry higher risk than regular stocks.
One lower-risk approach is the covered call strategy, where you:
• Own the stock
• Sell a call option on it at a higher strike price
• Collect a premium for short-term income
• Gain limited downside protection
3 Outcomes of Covered Calls:
1. Price rises → You profit from the premium, but the stock may be sold at the strike price.
2. Price drops → The premium cushions some loss.
3. Price stays flat → You keep the premium as profit.
Covered calls are ideal when you’re neutral to mildly bullish on a stock’s near-term outlook.