Prerequisites
You need to own at least 100 shares of the underlying stock before selling a covered call. Each options contract covers exactly 100 shares. You also need options approval (Level 1) at your broker. Covered calls are one of the safest options strategies — most brokers grant Level 1 approval quickly.
What Is a Covered Call?
A covered call is an options strategy where you sell a call option against stock you already own. In exchange, you collect an immediate cash premium. The buyer of the call has the right (not obligation) to purchase your shares at the strike price before expiration.
The word "covered" means you already own the underlying stock — so if the option is exercised, you can fulfill the obligation without having to buy shares on the open market.
You Receive
Premium cash upfront
Your Risk
Stock getting called away above strike
Your Requirement
Own 100 shares of the stock
How a Covered Call Works
Let's use AAPL as a practical example. You own 100 shares. You sell a call option with a strike price above the current price. You collect the premium. Now three things can happen at expiration:
AAPL stays below strike price
Best outcome for income generationThe option expires worthless. You keep your 100 shares AND the full premium. You can then sell another covered call next month. This is the most common and desirable outcome.
AAPL rises above strike price
Shares get called awayYour shares are sold at the strike price. You miss any gains above the strike, but you still keep the premium. You made a profit on the stock up to the strike price, plus the premium.
AAPL drops significantly
Partial protection from premiumThe call expires worthless (you keep the premium), but your stock position loses value. The premium provides a small cushion — if you collected $3 and the stock dropped $5, your net loss is $2 per share.
Step-by-Step Example: AAPL Covered Call
The Setup
You own
100 shares of AAPL
@$195/share
You sell
AAPL $200 Call
30 days to expiration
Premium collected
$3.00/share
$300 total (1 contract)
You immediately receive $300 cash (minus any broker fees) when you sell the call. This cash is yours to keep regardless of what happens.
At Expiration — Three Outcomes
AAPL closes at $195 (below $200 strike)
Best Case- Shares still in your account: 100 shares @ $195
- Premium kept: $300 (yours to keep)
- Net result: $300 income on $19,500 in stock
- Return: 1.5% in 30 days. Annualized: ~18%
AAPL closes at $210 (above $200 strike)
Capped Upside- Your shares are called away at $200
- Profit on stock: $5/share × 100 = $500
- Plus premium collected: $300
- Total gain: $800, but you miss the move to $210 ($1,000 additional)
AAPL closes at $180 (stock drops)
Cushioned Loss- Call expires worthless — you keep $300
- Stock loss: $15/share × 100 = -$1,500
- Net loss: -$1,200 (vs -$1,500 without call)
- The $300 premium reduced your loss by 20%
Best Case / Worst Case Summary
Best Case
- Stock stays below strike — call expires worthless
- You keep full premium as pure income
- Still own all shares — sell another call next month
- The "wheel" generates 1–3% monthly income on your portfolio
Worst Case
- Stock makes a huge move above strike
- You get capped — miss gains above the strike
- Or: stock drops hard while call reduces loss only slightly
- Max loss = stock going to $0 minus the premium collected
When to Use Covered Calls
✓ Good fit for covered calls
- You own 100+ shares of a stock you plan to hold long-term
- The stock is in a sideways or mild uptrend — not a strong bull run
- You want to generate regular income from an existing position
- You're okay capping your upside above the strike price
✗ Poor fit for covered calls
- You're very bullish and expect a large move up soon
- You can't afford to have shares called away (e.g., highly appreciated stock with big tax liability)
- The underlying is extremely volatile with wide bid/ask spreads
- You don't want to actively manage expiration cycles
Rolling the Option
"Rolling" means closing your existing covered call and opening a new one with a later expiration (and often a higher strike). You do this when a call is about to be assigned and you want to keep your shares.
Rolling Example
You sold AAPL $200 call expiring in 2 weeks, but AAPL jumped to $198
You buy back the $200 call for $2.50 (paying $250) — closing your position
Simultaneously sell the AAPL $205 call expiring in 45 days for $3.50 (collecting $350)
Net credit on the roll: $1.00/share ($100) — you collected more than you paid, and now have 45 more days and a $205 strike
Risks to Understand
Capped upside
If the stock runs strongly above your strike, you participate only up to the strike. In a strong bull market, covered calls can underperform simply holding the stock.
Tax implications (US)
Selling covered calls can disqualify the "qualified dividend" status of dividends and may affect the holding period for favorable long-term capital gains treatment. Consult a tax professional for your specific situation.
Early assignment risk
American-style options (all US-listed equities) can be exercised at any time before expiration. This is rare for out-of-the-money calls, but can happen around ex-dividend dates if the call goes deep in the money.
Concentration risk
Covered calls require 100 shares per contract — typically $5,000–$20,000+ per position for most stocks. If you're running covered calls on a single stock, that's significant single-stock concentration.
FAQ
Best Platforms for Covered Calls
tastytrade is purpose-built for options income strategies including covered calls. Fidelity and Schwab (thinkorswim) are excellent for equity-first investors who also want to run covered calls on their existing stock positions.