What is a Covered Call?
A covered call is an options strategy where you sell or write a call option against shares or tokens you already own. The underlying asset you hold covers your obligation if the call is exercised. This strategy generates income from premium but caps upside potential if the asset rises above the strike price.
How Covered Calls Work
When you sell a call, you receive premium immediately. If the underlying price stays below the strike at expiration, the call expires worthless, you keep the premium and your underlying. If the price rises above the strike, your underlying may be called away and sold at the strike price.
Example: You own 1 ETH at $2,000 and sell a $2,200 strike call for $100 premium. If ETH stays below $2,200, you keep the $100. If ETH rises to $2,500, you sell at $2,200, keeping the $100 premium but missing $300 of additional upside.
Covered Call Returns
The strategy profits in flat to moderately bullish scenarios. Maximum profit occurs when the underlying closes exactly at the strike, capturing full premium plus underlying appreciation up to the strike. Maximum loss occurs if the underlying falls substantially, though the premium provides some downside cushion.
Strike Selection
Choosing the strike price involves a trade-off. Higher strikes offer less premium but allow more upside participation. Lower strikes provide more premium but higher probability of being called away.
Covered Calls in DeFi
Several DeFi protocols offer automated covered call strategies. Ribbon Finance, Dopex, and similar protocols sell options on deposited assets and distribute premium to depositors. These vault strategies automate what would otherwise require active options trading.
When to Use Covered Calls
Covered calls are appropriate when you are willing to sell the underlying at the strike price, want to generate income from holdings, have a neutral to moderately bullish outlook, and are not expecting a dramatic price increase.