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Question:

Janet Powers writes a covered call on a stock she owns, Billings, Inc. The current price of the stock is $45, and Powers writes the call at a strike price of $50. The call option premium is $3.50. Which of the following statements regarding Powers’s covered call strategy is most accurate?

A Powers is trading the stock’s upside potential in exchange for current income.
Explaination

Powers is betting that the stocks price will not rise above $50. If she’s right, she will pocket the $3.50 and lose nothing. If the stock rises above the strike price, she is losing all of the upside potential. Once the stock price rises above $53.50, the benefit of the strategy (i.e., the income generated by the option premium) is offset by the gain she has foregone on the stock.