What Is a “Covered Call” Strategy and How Is It Used for Hedging?

A covered call is an options strategy where an investor holds a long position in an asset and sells (writes) a call option on that same asset. It is considered a conservative strategy used to generate income from the option premium.

While not a pure hedge against a price drop, it offers limited downside protection equal to the premium received. If the stock price stays flat or declines slightly, the investor profits from the premium.

However, the strategy also caps the potential upside profit if the stock price rises significantly above the option's strike price.