Using calls, you guarantee yourself a right to buy a security at a specific price and time. However, you are not obligated to do so. These calls boil down to essentially bets that the stock market as a whole will go up.

Writing Calls Defined

When an investor buys calls, they see upward potential in a stock but generally don't have the cash or desire to make a full commitment. Investors can also work the flip side of this transaction by selling. This is termed as "writing calls."

The person who is writing calls is obligated to deliver stock when the buyer exercises his or her option to buy. This gives the person writing calls a premium or payment. The writer then hopes the option will expire worthless so that the writer can walk away with his fee.

These calls are termed covered when the person writing calls already owns the underlying stock. For example, if you were to write calls on shares you already hold in your portfolio, this option would be covered. However, if you do not own the underlying stock, your call is considered a "naked" sale. Naked selling is extremely risky because the potential loss is unlimited.