What is the construction and primary investment objective of a 'Covered Call' option strategy?

[ A ]Buying high-strike Call options and Put options simultaneously on different stock exchanges.

[ B ]Holding long shares of a stock while simultaneously selling (writing) an Out-of-the-Money Call option against those shares to generate incremental premium income in a neutral-to-moderately bullish market.[ CORRECT ]

[ C ]Short-selling shares of a company while buying long-dated zero-coupon government bonds.

[ D ]Selling naked Put options without holding any cash or margin collateral.

Takeaway

A Covered Call is constructed by holding long shares while writing an out-of-the-money call against them, generating premium income in a neutral-to-moderately-bullish market in exchange for capping upside gains above the strike.

Derivation

The stock holding 'covers' the short call obligation — if the stock rallies past the strike and the call is exercised, the investor simply delivers shares they already own rather than facing unlimited naked-call risk, making this a conservative income-generation overlay rather than a speculative strategy. The trade-off is explicit: the investor collects premium income upfront and enhances total portfolio yield, but sacrifices any stock appreciation beyond the strike price, since those gains get called away. This risk-reduced, income-generating profile is why covered calls are commonly recommended for investors who are moderately bullish or neutral and want extra yield rather than aggressive upside participation, which the exam tests candidates' understanding of.

Why the others fail

A — Buying high-strike Call options and Put options simultaneously on different stock exchanges.

Buying high-strike calls and puts on different exchanges is not a covered call; a covered call requires an existing long stock position paired with a short call, not two purchased option legs.

C — Short-selling shares of a company while buying long-dated zero-coupon government bonds.

Short-selling shares while buying long-dated zero-coupon bonds describes an entirely different, unrelated strategy combining a bearish equity bet with a fixed-income hedge, not a covered call.

D — Selling naked Put options without holding any cash or margin collateral.

Selling naked puts without any collateral or cash backing is an uncovered, high-risk strategy distinct from a covered call, which specifically requires owning the underlying shares as cover.