How Does Collateralization Mitigate Risk in Writing a Covered Call?

Collateralization, by owning the underlying asset, ensures the writer can fulfill the obligation to sell without needing to purchase the asset at a potentially higher market price. The risk shifts from unlimited loss to opportunity cost, as the loss is capped at the difference between the asset's purchase price and the strike price plus the premium.

If the asset price rises, the loss on the option is offset by the gain on the underlying holding.