Covered Call: A strategy that combines a long stock position with a short call option on the same stock to generate premium income.

Covered Call

A strategy that combines a long stock position with a short call option on the same stock to generate premium income.

Definition

In a covered call, the investor holds 100 shares (or a multiple) of the underlying stock and sells (writes) a call option against that position. The short call is 'covered' because the investor already owns the shares needed to fulfill delivery if the option is exercised. Premium received from selling the call reduces the effective cost base of the stock and generates income in a flat or mildly rising market. The trade-off: if the stock rises above the strike price before expiry, the shares will be called away at the strike, capping the upside at the strike price plus the premium received. The downside is not fully protected - if the stock falls sharply, the premium received provides only partial offset against the loss. Covered calls are a common strategy in registered accounts (RRSPs, TFSAs) where the long stock is held. For CIRE purposes, understand the payoff diagram: maximum profit = (strike - purchase price) + premium; maximum loss = purchase price - premium (if stock goes to zero).

Source

Montreal Exchange (MX) listed options rules; CIRO IDPC options account requirements

Where this shows up on the CIRE

Outcome 5.3

Test yourself

Two real CIRE-bank questions on this exact outcome. Click to reveal the answer and the rule citation.

1
Statistics Canada releases a monthly report showing the Consumer Price Index (CPI) increased by 4.1% year-over-year, above the Bank of Canada's 2% target. Which economic indicator has been reported, and what is its primary significance for investment analysis?
Outcome 5.3 · click for answer
A.The CPI measures the change in the price of a fixed basket of consumer goods and services over time; a reading above the Bank of Canada's 2% target signals that inflation is running hot, which may lead the Bank to raise its overnight rate to reduce demand and bring inflation back toward target.Correct
B.The CPI measures the trade balance; a 4.1% reading means Canada is importing more than it exports.
C.The CPI measures corporate earnings growth; a 4.1% reading signals that corporate profits are rising.
D.The CPI measures unemployment; a 4.1% reading means unemployment has risen significantly.
The Consumer Price Index (CPI) published by Statistics Canada measures changes in the price of a fixed basket of goods and services purchased by Canadian households. It is Canada's primary inflation indicator. The Bank of Canada targets inflation of 2% (within a 1% to 3% control range). A CPI reading of 4.1% year-over-year indicates above-target inflation, which historically leads the Bank to raise its policy rate to cool demand. This has direct implications for fixed income prices, equity valuations, and currency movements.
2
A registrant is explaining economic indicators to a client. The client asks what the Consumer Price Index measures and why it matters for investment decisions. Which response is most accurate?
Outcome 5.3 · click for answer
A.The CPI measures the total market value of all goods and services produced in Canada during a quarter, making it the primary measure of economic output.
B.The CPI measures changes in the average prices of a fixed basket of goods and services purchased by Canadian households and is the primary indicator used to track inflation, which directly influences interest rate decisions and the real return on fixed income investments.Correct
C.The CPI measures unemployment rates among manufacturing workers and is used exclusively by labour market economists.
D.The CPI measures the profitability of the S&P/TSX Composite Index constituent companies and is used to forecast equity market returns.
The Consumer Price Index tracks changes in the average price of a representative basket of goods and services purchased by Canadian households, serving as the primary measure of inflation in Canada. Inflation directly affects investment decisions: it erodes the real return on fixed income securities, influences the Bank of Canada's policy rate decisions, and affects the purchasing power of savings. GDP measures total economic output, unemployment measures labour market conditions, and corporate profitability is tracked through earnings reports; not the CPI.

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