Covered calls are options trades that have a lot of utility. They can generate additional monthly income, which is how I utilize them in my stock advisory newsletter, The Liberty Portfolio. They can also be used to hedge long positions.
However, in some cases, they can also be used as both — to generate income and to hedge the downside a little. We have scenarios going on right now for which these covered call strategies will be perfect.
Covered calls are contracts in which you own an underlying stock, and you sell contracts for 100 shares each that give another investor the right to buy the stock from you at a particular price on or before a given contract expiration date. You get paid a premium for selling the contract.
If the stock trades above that price, you are obligated to either sell the stock or buy back the calls. If the stock trades below that price, you keep the stock and premium.