Covered Call
An options strategy where an investor holding an asset sells a call option against it, collecting a premium in exchange for capping their upside if the price rises above the strike.
A covered call is an options strategy in which an investor who already holds an asset sells ("writes") a call option against that holding, collecting the option's premium upfront in exchange for agreeing to sell the asset at the option's strike price if the buyer chooses to exercise it. The position is "covered" because the investor already owns the underlying asset needed to deliver if the option is exercised, unlike selling a call without holding the asset.
The strategy generates income from the premium collected and performs best in flat or modestly rising markets, but it caps the investor's upside at the strike price — if the asset's price rises sharply above the strike, the covered-call writer still only captures gains up to that strike, missing out on further appreciation they would have kept had they simply held the asset without writing the option. This tradeoff underlies many DeFi Options Vault (see Kaavon's "DeFi Options Vault (DOV)" glossary definition) products, which automate running a covered-call strategy on deposited assets.
Examples
- An investor holding Bitcoin might sell a covered call against it, collecting premium income but agreeing to sell at the strike price if Bitcoin rallies above it before expiration.
- A covered call's main tradeoff is capped upside: if the underlying asset surges well above the strike price, the writer still only captures gains up to that strike.