For those of you who know some things about stocks and investing, a "Covered Call Writer" is a specific type of stock market trader. She sells call options on stocks that she already owns. If you understood that last sentence, you can skip directly to What's the Deal?. Beginners, please hang in here. The 25-words-or-more description is about to begin.
The stock market is a place, actually several places, to buy and sell the stock of publicly traded corporations. Stock is simply a piece of paper that shows how much of the corporation that you own. The average investor buys stock in the hope that, over time, it will become worth more than he paid for it. I purposefully called the Covered Call Writer a "trader" rather than an "investor." For our purposes here, investors will be those people who purchase stocks for long term gains. Traders use the stock market to generate shorter term income.
The stock market also allows traders to buy and sell "options" to buy and sell stocks. Let's use an analogy with which many people will be familiar. Many people become home owners using a lease purchase option to buy their house. They find the house of their dreams but are unable to finance it right away for some reason. So, they offer the seller some amount of non-refundable money to be able to buy the house at a predetermined price on or before a later date. They plan to be able to arrange the necessary financing before the expiration date of their "purchase option."
One type of stock option works very much the same way. It is referred to as a "call" option. If you purchase a call option, you have the right to buy stock from the seller on or before the expiration date of the option. All options are designated by the month that they expire and all expire on the third Saturday of that month. All options also have a "strike price" which is the amount that you will pay for each share of stock that you buy from the seller. Each option contract is for 100 shares of the stock. Therefore a "Microsoft April 2006 27.50 call" would be for 100 shares of Microsoft (ticker symbol MSFT) at a price of $27.50 per share. The expiration date of the option was April 15, 2006.
In order for someone to buy an option, there must be a seller somewhere! Sellers are also referred to as "writers." We are not going to buy calls; we are going to sell calls and be "call writers." Remember that when we sell a call, we are giving someone the right to buy the stock from us. If, when we sell the call, we don't actually own the stock, we are said to be selling "naked." Conversely, if we do own the stock, we are selling a "covered" call.
So "Covered Call Writers" sell others the right to buy stock that the writer owns, at a predefined price within a predefined time frame. Or, as I said earlier, she sells call options on stocks that she already owns. Sounds easy dosn't it? See the section on What's the Deal? to see why you can't wait to be a Covered Call Writer!
