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Many investors mistakenly assume that all option strategies are inherently risky. In fact, some can be used to reduce risk. A call option is simply a contract between a buyer and seller that gives the call buyer the right to buy shares of a specific stock at a specific price (the "strike price") on or before a specific date (the "expiration date"). In return for this right, the call buyer pays the call seller (or "writer") what's referred to as a "premium". This premium is the source of the income that call writing produces.
The call option is considered "covered" if the call seller owns the stock against which the option is written. If the underlying stock reaches or exceeds the strike price on or before the option's expiration date, the option buyer may "call away" the shares represented by the option. If the underlying stock doesn't reach the strike price, the option will expire worthless. This is the reason some investors mistakenly think all options strategies are risk — a call buyer can lose his entire investment in a relatively short time. In contrast, a call seller seeks to generate premium income in return for agreeing to sell his or her shares at a pre-determined price. Due to the additional cash flow generated, a stock portfolio with calls written on it will fluctuate less (i.e. be less volatile) than a portfolio that holds the same stocks without calls written on them.
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