This movie/ video explains the concept of Covered Call in the CFA exam. If you are not familiar with call options, please refer to the "Introduction to Call Option". Related Topics are:.Introduction to Put Options and Protective Put. The following is the transcript.

If you understand how to construct a Protective Put, you should be able to understand Covered Call without any problem. Still, the scenario is that you are holding a stock S. Assume you bought it for $20. Unlike in Protective Put situation, the stock’s performance is so-so. You expect it to stay around $20 in the coming 3 months. So how can you increase the income? One strategy is to use Covered Call. In this strategy, you will “write” (or sell/ or short) a call option with exercise price at $21, premium $1 and to be expired in 3 months. So, for shorting a call option, the curve is like this. When the stock is less than $21, the call option is “out-of-money” and the buyer will not exercise the option. So you will earn the $1 premium. Combining with the stock you are holding, you will have $1 extra income in additional to however the stock performs.

However, there is no free lunch. The downside of covered call is that if the stock turns out to be well-performed, i.e. rises above $21, the holder of the call option will exercise the option. And you are forced to sell your stock to him at $21 regardless of the market price (e.g. $30). The gain of your portfolio will be capped at $21-$20 + premium = $2. So, the combine curve is just like shorting a put option!