I do this often with shares that I own - mostly as a learning/experience-building exercise, since I don't own enough individual stocks to make me rich (and don't risk enough to make me broke).
Suppose I own 1,000 shares of X. I don't expect my shares to go down, but I want to be compensated in case they do go down. Sure, I could put in a stop-loss order, but another option is to sell a call above where the stock is now (out-of-the-money).
So I get the premium regardless of what happens. From there three things can happen:
- The stock goes up, but not above the strike - this is the "best case" - I made money by owning the stock, and the option expires worthless, so I keep the stock. I made the premium PLUS the amount that the stock went up.
- The stock goes up past the strike price. I still get the premium, and my stock went up, but I now have to sell it for the strike price.
- The stock goes down. I lose money on the stock, but I earned the premium from the option, which expires worthless
So a covered call essentially lets you give up some upside for some compensation against downward moves. Mathematically it's roughly equivalent to selling a put option - you make a little money (from the premium) if the stock goes up but can lose a lot if the stock plummets.
So you would sell call options if:
- You expect the price to rise slightly (or don't care that your gain is capped if it rises a lot)
- You don't expect the stock to fall significantly
- You think the options are overpriced relative to the risk (this is more of a value play - if you think implied volatility is high and want to sell options to capture some of that value).