The goal of the covered-call strategy is ensuring that investors are always making decisions for themselves, rather than leaving that to the stock market.
If a stock is at $50, for example, an investor could opt to sell a call option with a strike price of $60 that expires in three months. In return, the investor would collect an options premium of say $2 per share, creating a potential effective sale price of $62. If the stock price remained below the call strike price of $60, the investor would keep the options premium. Should the stock price exceed the strike price at expiration, the investor could allow the stock to be sold at $60, or perhaps buy the callback and “roll” to a higher strike price in a more distant month.
The sale of an option against a stock generates what we call a “conditional dividend” payment. What is the condition of the dividend? The investor must be willing to sell the stock at the predetermined sales price. In return for making that decision, the investor collects the amount of money that was received for selling the call. The strategy can create taxable events and it is important to consult a tax advisor.