Covered call

What it means

Holding the underlying and writing a call against it, collecting the premium in exchange for capping the upside.

The exam angle

Not a hedge. It gives up the right tail to earn income and leaves the downside almost fully intact.

Where it appears in the syllabus

• Derivatives & Risk ManagementCFA Level III · exam weight 10–15% · Options strategies, swaps/forwards/futures strategies, currency management.
• DerivativesCFA Level I · exam weight 6–9% · Forwards, futures, swaps, options and arbitrage-free pricing.

Related terms

• Protective putHolding the underlying and buying a put, which sets a floor under the position at the cost of the premium.
• StraddleBuying a call and a put at the same strike and expiry — a position on the size of a move rather than its direction.
• CollarHolding the underlying, buying a put and writing a call, bounding the outcome between a floor and a cap.
• Currency hedgingUsing forwards, futures or options to reduce a portfolio’s exposure to exchange rate movements on foreign assets.
• Derivatives overlayAdjusting a portfolio’s exposures with derivatives while leaving the underlying holdings untouched.
• Basis riskThe risk that a hedge and the exposure it hedges do not move together, leaving a residual.