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 price change of a fixed basket of consumer goods and services; a reading above the Bank of Canada's 2% target signals inflation is running hot, which may prompt a rate hike to cool demand.Correct
B.The CPI is Statistics Canada's unemployment gauge; a 4.1% year-over-year reading indicates the jobless rate has climbed sharply, prompting concern about a weakening labour market and slower consumer spending.
C.The CPI tracks the average growth rate of Canadian corporate earnings; a 4.1% reading indicates strong profit growth, which analysts view as a bullish signal for equity valuations and dividend payouts.
D.The CPI measures Canada's trade balance; a 4.1% reading indicates the country is importing significantly more than it exports, which typically weakens the Canadian dollar against major trading partners.
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 total output of goods and services produced in Canada each quarter
B.The CPI tracks quarterly earnings and profitability of S&P/TSX Composite constituent companies
C.The CPI tracks changes in prices of a fixed household basket and signals inflation trendsCorrect
D.The CPI measures unemployment levels among workers in the manufacturing sector
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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