What Are Covered Calls, and Are They Right for You?

The last two years have seen record options-trading volumes[0], thanks to historic volatility and the rise of mobile brokerages.

If you’re new to options trading — or you’re thinking about getting into it — you might be wondering which strategies are right for you. One simple type of options trade is the covered call.

What is a covered call?

A covered call is an options trading strategy that involves selling (also known as “writing”) call options on a stock you own, in an effort to collect the option premium.

For example, suppose that you own Amazon shares and want to collect passive income from them. Amazon doesn’t pay dividends, but if you sell call options on your shares, and those options go unexercised, you’ll receive a “dividend-like” payment from the sale of the options without having to do anything in return.

Like any other investment strategy, selling a covered call has risks, but it’s generally seen as a conservative strategy favored by investors who are…

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This article was written by Sam Taube and originally published on www.nerdwallet.com