Hedging - Covered Calls

Function: Hedging
Outlook: Neutral/Pessimistic

When you own stock and you write (sell) call options against said stock, the calls are said to be "covered calls." They are covered because if you person who you sold to exercises the calls, you already own the stock that you have promised to sell.

Selling covered calls is a way to make an additional profit on the stock your currently own.  For example, assume you own 1,000 shares of Cisco (CSCO) which trade for $25, and one-month calls with a strike price of $27 currently trade for $.30.  You can write options against your 1,000 shares and receive $300 ($.30 x 1,000).  If the stock is below $27 on the day of expiration, the options expire worthless and you get to keep the $300 and your stock.  If the stock is above $27, you get to keep the $300 but you will have to sell your stock for $27 per share, no matter where the stock is above $27 (even if it goes to $100, you sell at $27).