The Covered Call Strategy
Generate income on stocks you already own by selling call options.
What is a Covered Call?
A covered call is an income strategy where you sell a call option against shares you already own. You collect premium upfront, and in exchange, you agree to sell your shares at the strike price if the stock rises above it.
Is This Strategy Right for You?
Capital Requirements
You need to own (or buy) 100 shares of the stock. For a $50 stock, that's $5,000 in stock ownership.
Options Approval Level
Level 1 or 2 at most brokers—covered calls are one of the most basic options strategies you can trade.
Best Suited For
- •Investors who already hold shares they're comfortable selling
- •Income seekers who want to generate yield on existing positions
- •Those with a neutral to slightly bullish outlook
Pros and Risks
Advantages
- ✓Generate income: Earn premium on stocks you'd hold anyway
- ✓Lower cost basis: Premium reduces your effective purchase price
- ✓Simple strategy: One of the easiest options strategies to learn
Risks to Consider
- ⚠Caps upside: Potential gains limited if stock rallies significantly
- ⚠Stock can drop: You still own and bear risk of decline
- ⚠Called away risk: You may have to sell shares you wanted to keep
How It Works
Key Terms
Own 100 Shares
You need shares you'd be comfortable selling at your chosen strike price.
Sell a Call Option
Choose a strike and expiration that fits your goals.
Strike: Typically 5–10% above current price
Delta: 0.20–0.35 balances premium vs. probability
Expiration: 30–45 DTE for optimal theta decay
Example: Selecting Your Call Strike
| Strike | Bid | Ask | Delta | DTE |
|---|---|---|---|---|
| $52 | $1.80 | $1.90 | 0.42 | 35 |
| $53 | $1.40 | $1.50 | 0.35 | 35 |
| $54← RECOMMENDED | $1.00 | $1.10 | 0.28 | 35 |
| $55 | $0.70 | $0.80 | 0.22 | 35 |
| $56 | $0.45 | $0.55 | 0.16 | 35 |
Strike 5–10% above current price: $54 is 8% above $50, balancing premium with room for gains
Delta 0.20–0.35: ~28% chance of being called away. Good premium vs. probability trade-off
30–45 DTE: Optimal theta decay—most premium captured in the final weeks
Note: Premium is per share. Multiply by 100 for total received per contract (e.g., $1.00 bid = $100 received).
Collect Premium and Wait
Two outcomes at expiration:
Expires OTM
Keep premium + keep shares. Sell another call.
Called Away
Keep premium + sell shares at strike. Restart or exit.
Worked Example: ABC Stock at $50
Selling a covered call and seeing both outcomes.
Covered Call Payoff at Expiration
Sell Covered Call
Stock
$50.00
Call Strike
$54.00
Premium
+$100
Breakeven
$49.00
Called Away (stock rises to $56)
Sold at
$54.00
Premium
+$100
Stock Gain
+$400
Total
+$500
Note: You "missed" $200 of upside since stock went to $56
Expires OTM (stock stays at $51)
Shares
100 kept
Premium
+$100
Next
Trade Outcomes
Scenario A: Called Away (stock rises to $56)
Total Profit
Scenario B: Expires OTM (stock stays at $51)
Common Scenarios
Stock Drops Significantly
Your call expires worthless—you keep the premium but still own shares at a loss.
A: Sell another call at a lower strike for more premium
B: Hold shares if you believe in the long-term
C: Exit the position entirely
Stock Rallies Past Your Strike
You'll be called away at the strike price. You made money, but capped your upside.
Accept it: This is the trade-off of the strategy
Roll up: Buy back call, sell higher strike for net credit
Stock Stays Flat
Ideal scenario—you keep premium and shares!
Next step: Rinse and repeat with another call