What Is Covered Call?
A covered call is selling a call option against shares you already own to generate income. It caps your upside but adds a reliable income stream to your portfolio.
Definition
A covered call is an options strategy where you own 100 shares of a stock and simultaneously sell a call option on those shares. You receive premium income upfront in exchange for capping your upside at the strike price. If the stock stays below the strike, you keep the premium and your shares.
It's called 'covered' because your shares cover the obligation to deliver them if the option is exercised. You're not naked — you already own the stock. This makes covered calls one of the few options strategies available in basic brokerage accounts.
The tradeoff: you cap your gains. If you sell a $110 call on a $100 stock and the stock rockets to $130, you're forced to sell at $110. You still profit (from the $10 gain + premium), but you miss the extra $20. That's the cost of the income.
Real-World Example
You own 100 shares of a $100 stock. You sell a $110 call expiring in 30 days for $2 ($200). Three outcomes: (1) Stock stays at $100 — call expires worthless, you keep $200 income. (2) Stock rises to $107 — call still expires worthless, you keep $200 + $700 in stock gains. (3) Stock rises to $120 — call is exercised, you sell at $110. You made $1,000 on shares + $200 premium = $1,200, but missed the extra $1,000 from $110 to $120.
Why It Matters
Covered calls are the most popular options income strategy — they let you monetize a stock position you'd hold anyway, adding 1-3% monthly income on top of any dividends.
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Frequently Asked Questions
What happens if my covered call gets assigned?
Assignment means the option buyer exercises their right to buy your 100 shares at the strike price. You're forced to sell at the strike, but you keep the premium. You profit from the premium + any stock appreciation up to the strike. After assignment, you no longer own the shares.
What strike should I use for a covered call?
Most covered call sellers target strikes 5-10% above the current stock price (out of the money), expiring 20-45 days out. This gives reasonable premium while allowing for stock appreciation. The further OTM, the lower the premium but the less likely you'll be assigned.
Can I lose money selling covered calls?
Yes — if the stock drops sharply, the premium you collected doesn't offset large stock losses. The covered call doesn't protect you from a stock decline — it only provides a small cushion. In a crash, you still lose on the shares (though slightly less than someone who didn't sell the call).
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