Stock options can not only be bought by investors but sold by investors as well. This allows them to generate income by collecting on the premiums paid. Investors who wish to generate additional income in the form of premiums can utilize a covered call option strategy. A covered call strategy is when an investor sells a call option while at the same time holding the underlying stock long position. This option trading strategy limits the upside potential of the investment during the duration of the option. It also eliminates the risk of potential infinite losses if the underlying stock price begins trading higher than the option strike price. However, an option seller is obligated to deliver the stock if the underlying stock price exceeds the strike price as well.
Therefore, an investor who sells a covered call may have their shares sold at the strike price and may no longer participate in any future stock price increases. The risk of losing the entire investment in the stock less the premium collected is also the maximum potential loss.