A covered call is a position whereby long stock is paired with a short call. This strategy is also known as a buy-write since the stock is bought and the option is sold (written). The long stock position is bullish, but the short call position is bearish, which neutralizes the long stock above the strike price of the call.
The covered call is a common cost basis reduction strategy for a long stock position where the sale of the call brings in premium but simultaneously limits the potential gain of the stock position.
There is forfeited opportunity in the trade when price rises beyond the strike price of the call, at which point the gains on the stock become capped. (This is essentially the same effect as that of a covered put position where gains in the short stock are capped beyond the strike price of the short put.)
The risk in this position is on the downside, as there is no hedge against the long stock position in a falling market.
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