Covered option

A covered option is a financial transaction in which the holder of securities sells (or "writes") a type of financial options contract known as a "call" or a "put" against stock that they own or are shorting.

The seller of a covered option receives compensation, or "premium", for this transaction, which can limit losses; however, the act of selling a covered option also limits their profit potential to the upside.

[1][2] This strategy is generally considered conservative because the seller of a covered option reduces both their risk and their return.

[4] Covered calls can be sold at various levels of moneyness.

Out-of-the-money covered calls have a higher potential for profit, but also protect against less risk, as compared to in-the-money covered calls.

Payoffs from a short put position, equivalent to that of a covered call
Payoffs from a short call position, equivalent to that of a covered put