A covered call spread is the simultaneous purchase of stock and the sale of a call option of equal value. It can, also, be sale of a call option against an existing stock position where it is not easy to move out of the position without having to deal with things like taxes or other investment reasons such as it being a retirement account or other longer-term investment strategies where investors do not or cannot, typically, try to time the market and get in and out during market interruptions.
The covered call spread strategy, when held over a longer period of time, can significantly reduce portfolio volatility without necessarily sacrificing performance potential. This is achieved by (a) selling insurance to the marketplace in the form of a call option and (b) capturing the volatility risk premium embedded in these options. However, it is important to also know when covered calls are used for very short periods of time it can result in a more significant under performance relative to a benchmarked long equity position.
Summary: The covered call spread strategy is basically viewed as selling a form of insurance whereby the option seller receives an upfront call premium for writing insurance to a buyer who wishes to gain long exposure with limited downside risk. The main risk and potential cost at expiration to the call option seller is the liability born if the asset moves above the strike price plus premium points received.
