A covered call generates income from stock you already own. You sell someone else the right to buy your shares at a fixed price, and collect a premium for it. If the stock stays below that price, you keep the premium and your shares. If it rises above, your shares get bought — at a price you agreed to in advance.
If you own 100 shares of a stock, you can sell a call option against those shares. Selling the call brings in premium — cash you keep immediately, regardless of what happens next. In exchange, you agree to sell your shares at the strike price if the option is exercised.
The word "covered" means you already own the stock. If you sold the call without owning shares, that's a naked call — a very different and much riskier trade. The covered call is one of the most conservative options strategies because your stock position covers the obligation.
Example: You own 100 shares of a stock at $50. You sell the $55 call expiring in 30 days for $1.50 per share ($150 total). Three outcomes:
Stock stays below $55: The call expires worthless. You keep the $150 and still own your shares. You can sell another call next month.
Stock rises to $57: The call is exercised. You sell your shares at $55. Total proceeds: $55 + $1.50 premium = $56.50 per share. You gave up the final $1 of upside but captured $6.50 from your entry.
Stock falls to $44: You keep the $150 premium, which partially offsets the stock loss. Your effective cost basis drops from $50 to $48.50.
Maximum profit: (Strike price − stock cost + premium received) × 100. Your upside is capped at the strike. In the example: ($55 − $50 + $1.50) × 100 = $650.
Maximum loss: The stock falls to zero, minus the premium received. Same risk as owning the stock — the premium gives a small cushion but doesn't change your fundamental downside exposure.
Breakeven: Stock purchase price − premium received. In the example: $50 − $1.50 = $48.50.
You expect the stock to stay flat or rise modestly. If you think the stock is about to run 30%, selling a covered call caps that gain. It works best when you expect sideways to slightly bullish movement.
You want to generate income while holding. The premium adds yield to a stock position — many traders think of it as collecting rent on shares they already own.
Implied volatility is elevated. When IV is high, call premiums are inflated. Selling during high IV means collecting more premium for the same obligation.
You're very bullish on the stock. Selling a call caps your upside. If you think the stock could run 20–30%, you're giving that potential away for a small premium.
You're not willing to sell the shares at the strike price. If the stock rises above your strike, your shares get called away. Only sell calls at a strike you'd be genuinely comfortable selling at.
What strike should I sell for a covered call?
Most traders choose a strike 5–10% above the current stock price. This gives the stock room to appreciate while still bringing in meaningful premium. Higher strikes generate less income but allow more upside before the shares are called away.
What expiration works best?
30–45 days is the most common range. Theta decay accelerates in the final 30 days, which works in the seller's favor. Many traders roll to a new expiration each month as a repeating income strategy.
What if the stock drops significantly?
The premium offsets a small portion of the loss, but a covered call doesn't protect you from a large decline. If downside protection is the goal, a protective put is more appropriate.
Can I lose more than the stock itself?
No. Your maximum loss is identical to owning the stock — the premium received slightly reduces that loss, nothing more.