Covered call
What does it mean to sell away the upside of an asset in exchange for steady income, and what does that cost in a strong week?
In plain words
A covered call is holding an asset while selling a call option on it, which gives the buyer the right to buy the asset at a set price. The seller keeps the premium (the payment received) but gives up gains above that price.
Why it matters
The premium adds income in flat or mildly falling weeks, but it also places a ceiling on the position. In a sharp rally, the asset can be taken at the strike price, leaving the holder behind the market while the option buyer keeps the upside.
In a real week: ETH, week of 20 July 2020
ETH opened the week of 20 July 2020 at 239.12 and closed at 311.0, a gain of 30.06%, finishing in the upper third of the week range, at 90.9% between the 234.05 low on Monday 20 July and the 318.75 high on Sunday 26 July at 08:00 UTC. A call sold at or near the open would have been far in the money, capping the position near the strike while the asset rose more than thirty percent.
A common mistake
Treating the premium as free income. It is compensation for handing over any gain above the strike price, so a large weekly rise is exactly when that handover costs the most.