A ONE-STOP PORTAL OF INFORMATION FOR FUTURES AND COMMODITIES TRADERS
A covered call is a call sold against a long futures
position; that is, the writer of the call takes on a
potential obligation to provide a futures contract at a
specific price, and tries to mitigate his risk by
simultaneously buying futures. The premium is collected
up front at the initiation of the position. Income is
earned if futures hold stable to slightly higher or
lower, allowing the writer of the call to retain the
options premium. The position is helped by lower
volatility and the passage of time, all of which make it
unlikely that the options contract will be
exercised.
Profits are limited to the premium
received plus some appreciation in the futures position.
Losses are potentially unlimited. The premium received
from the sale of the call acts as a partial hedge
against the futures position as prices decline.
