A covered call combines a long position in a stock with a written call. The payoff is similar to cash plus a short put option because the upside is capped at the strike price plus the premium, but still has the downside of the strike price less the stock price. Note that a long stock plus a long put is a protective put. A short stock plus long call will profit as the stock price declines, but if the stock price rises, losses are limited by the long call. A short call plus cash receives a premium, but has unlimited downside if the price of the stock rises. |
