Covered Call Terminology

Call Writing Definitions and Terms

This covered call terminology resource page is for you if you're brand new to writing covered call options, or if you'd just like a refresher.

For additional option terminology, be sure to check out the stock option definitions page, and for more educational resources related to options and option trading, please visit the Option Trading Education section.

Covered Call Terminology -
Call Writing Definitions and Terms

Call Option - contract that gives the holder the "option" of buying 100 shares of an underlying stock at a certain price by a certain date.

Writing a Covered Call vs. Selling a Covered Call - No difference - both terms describe the same process - specific terminology is based on personal preference.

Covered Call - What makes a covered call "covered?" When you write or sell a covered call and receive premium for granting someone else the write to buy 100 shares of the underlying stock from you at a certain price by a certain date, you actually must own those shares beforehand in order for the short call to be considered "covered" - the position is covered by your ownership of the stock in question.

Naked Call - When you write a call option but don't actually own the underlying shares of the stock, the position is considered a naked call - there's nothing "covering" or protecting the short call position. Note: this is an extremely risky strategy since your potential profits are unlimited, and it's unlikely in any case that your broker would even allow you to set up this trade.

Buy-Write Strategy - A covered call strategy in which the purchase of the shares and the sell of the call are done simultaneously.

Strike Price - The price at which a call holder has the right to buy 100 shares of the underlying stock at or prior to the expiration of the call option contract.

Covered Call Premium - The payment you receive for writing or selling the covered call and granting someone else the right to purchase your shares from you at the agreed upon strike price during a set time period.

Expiration Date - The date at which a covered call option expires (technically, the Saturday following the market close on the third Friday of a given month) - the call can be manually exercised by the call holder at any time prior to expiration or, if the strike price is in the money upon expiration, it will be exercised automatically.

Exercise and Assignment - The holder of the long call (the other side of the covered call) can manually exercise the call option at any point prior to expiration and purchase the underlying shares from you at the agreed upon strike price. Upon expiration, if the call option is in the money (i.e. the share price is higher than the strike price), the option is automatically exercised. When a long call is exercised, it's considered to be "assigned" to the writer of the call.

In the Money - A covered call is in the money when the strike price is below the current share price - example: a call option at the $30 strike price would be $2 in the money if the underlying stock traded at $32/share.

At the Money - A covered call is at the money when the strike price and the share price are the same - example: a call option at the $30 strike price is at the money if the underlying share price is also trading at $30.

Out of the Money - A covered call is out of the money when the strike price is higher than the current share price of the underlying stock - example: a call option at the $30 strike price is out of the money if the underlying stock is trading at $28/share.

Rolling a Covered Call - The act of buying back a covered call you originally wrote or sold at one strike price and expiration date and then writing or selling a new call at a later expiration date either at the same strike price (rolling out) or at a higher strike price (rolling up and out).