Covered Call

A Covered Call strategy, also known as a Synthetic Short Put, is a bullish strategy constructed from a short call (red) and a long position in the underlying stock (purple). It’s a strategy wherein the writer (seller) of the call typically already owns the underlying stock on which the option is written and believes that the market has implied too much volatility in the underlying.

Since option prices rise with volatility, if the market implies too much volatility, it’s possible to capture the premium represented by the difference in option prices resulting from the gap between the perceived and implied volatilities. Naturally, the seller hopes that time decay will render the short call worthless at expiry, thereby turning the entire premium received into profit.