Examining the Covered Call Strategy
With a covered call, the manager holds an underlying position on individual stocks or an index-like position. However, the manager seeks to supplement their return by systematically selling calls against their long positions and collecting that option premium. For more on a call option, see here.
Below is a graph outlining the return profile of a covered call strategy, with the underlying stock as the dotted line and the combined equity-and-short-call return profile as the solid line.
Seeking Portfolio Protection vs Portfolio Cushioning
Options strategies are increasingly becoming more accepted as a tool the portfolio construction. One of the most common option-based strategies is the covered call.
All options-based strategies are not created equal. However, many investors tend to lump all strategies that utilize options together. This is an erroneous approach, as different strategies have very different objectives and different ways of utilizing options.