Covered call

Also called: Buy-write, Covered call writing

A covered call pairs a long stock position with a short call option on the same stock. You keep the shares and the dividends, collect the option premium up front, and agree to sell at the strike price if the stock rises above it before expiration.

How does a covered call work?

You own at least 100 shares (one option contract covers 100 shares) and sell a call at a strike above the current price. If the stock stays below the strike, the call expires worthless and you keep the premium plus the shares. If it finishes above the strike, the shares are called away at the strike — you still keep the premium, but you forgo gains beyond it.

The premium is income today in exchange for giving up the right tail of the return. That trade is why covered calls are used to generate cash flow from a position and to soften — though not eliminate — downside.

Why does it matter for concentrated stock?

On a large single-stock position, systematically writing calls turns the holding into an income source and can fund taxes or diversification over time. Done as a "qualified covered call," it can also avoid resetting the holding period of the underlying shares.

This definition is for educational and informational purposes only and is not investment, tax, or legal advice. Option strategies involve risk and are not suitable for all investors. Tax treatment of options is complex and depends on individual circumstances, holding periods, and applicable law. Consult a qualified tax professional and investment advisor before acting. Yayati Asset Management is a Registered Investment Adviser.