Covered call is a strategy used to generate synthetic stream of income,

Covered call writing is considered a lower-risk option strategy. You buy the shares of the underlying shares and sell covered call options against those shares. If the stock rises and the calls are exercised, the covered writer simply delivers the shares to the call buyer at the strike price of the call.

Assuming XYZ is at $50 per share, and the XYZ December 55 calls are trading at $2, the covered call writer would buy the shares and write (sell) a December 55 call. At this point, the covered call writer has reduced the cost of holding XYZ by $2 per share. He paid $50 for the shares, less $2 per share in premium income.

The trade makes money in a rising market, in a flat market and because it reduces the cost of the underlying shares, it carries less risk than an outright long position in the underlying stock.

The maximum profit occurs at the strike price of the call. If the stock is above $55 per share at expiration, the call will be exercised, and the covered call writer will deliver the shares at $55 each. Maximum profit is $7 per share; $5 per share, which is the difference between the cost of buying the shares and the strike price of the option, plus $2 per share option premium. Only if the underlying stock rises dramatically between the time the calls are written and the expiration date, is the covered call writer in an inferior position. Maximum risk would occur if the stock were to decline to zero. Mind you that is not a risk factor of the covered

Call option seller or writer: Call option Seller, on the other hand, He is obligated to deliver the underlying stock at the strike price when buyer choose to exercise his call option as well He receives a fee is called as ‘premium’ for taking such risk;

Covered call in simple terms is to sell to somebody else, the right to buy 100 shares you own at a higher price than its current trading price. On the other side, the buyer of a call option is very optimistic as I mentioned that the price of the stock can rise above the seller’s expectation’s stock price.

Outcomes:

If price of the stock fails to increase in its price. the seller of the option or the covered call writer of the option keeps the stock and receives premium or the fee from the buyer from selling the call.

If the stock rise above the seller’s expectation price, up on option exercised by buyer, Seller is obligated to deliver the stocks, means loose the stocks owner but He or she keeps the premium from the selling the call and the profit from selling at the higher price.

Note: Covered call means the seller of the call already own 100 shares in his stock account and maintains an obligation to deliver a stock to an option buyer up on exercise.