How it works
While holding a stock, the investor sells a call option on that same stock and receives the option premium. If the share price does not rise past the strike price, the premium becomes pure profit; but if the price rises significantly past the strike price, the investor may have to give up the stock (forgoing part of the upside gain).
What to keep in mind
The strategy is sometimes described as a way to accumulate premium income in a market with limited price movement, but it does not eliminate the risk of the underlying stock itself declining in value. In recent years, mutual funds and ETFs that incorporate a covered call strategy have also appeared, but it is important to examine their distribution levels and mechanics before considering them.