Options Basicsby InvestorGuide Staff
Covered call: A call option is sold in a stock already owned by the writer. This is an attempt to take advantage of a neutral or declining stock. If the option expires unexercised, the writer keeps the premium. If the holder exercises the option, the stock must be delivered, but, because the writer already owns the stock, risk is limited. This is the opposite of an uncovered call, when the writer sells a call for a stock that he does not already own, a very dangerous strategy with unlimited risk. As an options trader, it would be more profitable to purchase uncovered calls but more risky for options writers.