A trading strategy that consists of writing call options on an underlying position to generate income from option premiums. Because the options position is covered by the underlying position, the downside risk of writing the option is minimized.

For example, suppose a trader has a 100-share position in XYZ stock and purchases the shares for $10 each. Soon after, the trader decides to write a call option for XYZ stock at an exercise price of $12.50, selling it for a small premium. As long as the price of XYZ stays below $12.50 until maturity, the trader will keep the premium. If the price rises above the $12.50 level and is exercised, the trader will be required to sell the shares at $12.50 to the option holder. The trade will only lose out on the difference between the exercise price and the market price.

Investment dictionary. . 2012.

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