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Options TradingLesson 8

Covered Calls Strategy

Generate premium from stocks you already own. The most popular options strategy for stockholders.

9 min read
Intermediate

Educational purposes only. This content does not constitute investment advice. Read our disclaimer

StockCram is not a broker-dealer, investment adviser, or financial institution. All content is for educational and informational purposes only and should not be construed as personalized investment advice. Consult a qualified financial professional before making investment decisions. Past performance does not guarantee future results.

TL;DR

**Own 100 shares → Sell a call option → Collect premium.** You get paid for agreeing to sell your shares at a higher price. If the stock stays below that price, you keep everything.

The secret to making money in stocks is not to get scared out of them.

Joel Greenblatt— Founder, Gotham Capital

What is a Covered Call?

A covered call is when you sell a call option on stock you already own. The "covered" part means your shares back up the option - you're not taking on naked risk.

The Basic Setup

1.You own 100 shares of a stock (must be in lots of 100)
2.You sell a call option at a strike price above current price
3.You collect the premium immediately - it's yours to keep
4.You wait until expiration or close the position early

The Three Outcomes

Scenario 1: Stock stays flat or drops slightly

The call expires worthless. You keep your shares AND the premium.

The option seller retains the premium collected

Scenario 2: Stock rises but stays below strike

You keep both the stock appreciation and the premium.

Both components may contribute to the position value

Scenario 3: Stock rises above strike price

Your shares get "called away" (sold) at the strike price. You keep the premium too.

⚠ You made money, but missed additional upside

Real Example: Apple Covered Call

You own

100 shares of AAPL at $175

You sell

$185 call, 30 days out

Premium received

$2.50 × 100 = $250

Premium as % of stock value

$250 / $17,500 = 1.4% (illustrative example)

What happens at expiration?

If AAPL is...ResultPosition P/L
$170 (dropped)Keep shares + $250-$500 stock, +$250 premium = -$250
$175 (flat)Keep shares + $250+$250 (premium only)
$183 (up a bit)Keep shares + $250+$800 stock + $250 = +$1,050
$195 (up a lot)Shares sold at $185+$1,000 stock + $250 = +$1,250

Note: At $195, you missed $1,000 in extra gains. That's the trade-off.

Choosing Your Strike Price

StrikePremiumChance of AssignmentBest When
ATM (at current price)Highest~50%Want max income, okay selling
5% OTMMedium~20-30%Balanced approach
10% OTMLower~10-15%Want to keep shares, some income

When Covered Calls Work Best

✓ Good for covered calls

  • • Stocks you plan to hold long-term
  • • Sideways or slowly rising markets
  • • Stocks with decent volatility (higher premiums)
  • • When you'd be happy selling at the strike

✗ Not ideal

  • • Stocks you expect to explode upward
  • • Right before major catalysts (earnings, FDA)
  • • Stocks you never want to sell
  • • Very low volatility stocks (tiny premiums)

Step-by-Step to Sell a Covered Call

  1. 1

    Confirm you own 100+ shares

    Must be in lots of 100

  2. 2

    Open the options chain

    Find calls for your stock

  3. 3

    Select expiration

    Different expirations have different premium/time trade-offs

  4. 4

    Choose strike price

    Higher strikes = lower premium, lower assignment probability

  5. 5

    Select "Sell to Open"

    NOT "Buy" - you're the seller

  6. 6

    Use limit order at or near bid

    You'll get filled at bid or better

  7. 7

    Review: 1 contract = 100 shares

    Make sure quantities match

Key Takeaways

  • •Own shares first - You need 100 shares to sell 1 covered call contract.
  • •You get paid to wait - Collect premium while holding stocks you'd keep anyway.
  • •Trade-off is capped upside - If stock rockets, you miss gains above your strike.
  • •Works best in flat/slow markets - Where premiums add up over many months.

Terms You Learned

Covered CallPremiumAssignmentCalled AwaySell to Open

Continue Learning

Guide

What Is a Call Option?

Understand call options before writing covered calls — full guide.

Read What Is a Call Option?
Guide

What Is Theta Decay?

How time decay works in your favor when selling covered calls.

Read What Is Theta Decay?
Lesson

Protective Puts

The other side of the coin - protecting your shares

Read Protective Puts
Lesson

When to Use Options

Match strategies to your goals

Read When to Use Options
Calculator

Options Calculator

Calculate covered call income and breakeven points.

Read Options Calculator

Frequently Asked Questions

Premium amounts vary by stock volatility, time to expiration, and strike selection. Higher volatility stocks typically have higher premiums but also higher risk of assignment. Actual results depend on market conditions and cannot be predicted in advance.

You keep the premium you collected, which cushions your loss. However, you still own the stock and bear the full downside risk minus the premium. Covered calls provide a small buffer, not full protection.

Yes! You can buy back the call option at any time to close the position. If the call has lost value (stock went down or time passed), you can buy it back for less than you sold it for and pocket the difference.

It depends on your goal. Higher strikes = lower premium but more upside if called away. Lower strikes = higher premium but more likely to be called. Many traders use strikes 5-10% above current price for monthly calls.

You can always buy back the call before expiration if the stock is rising toward your strike. Yes, it might cost more than you received, but you keep your shares. Or simply use higher strike prices to reduce the chance of assignment.

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