Options Income Strategies
What Is a Covered Call?
Learn how investors can collect option premium from shares they already own, what happens at expiration, and the risks and trade-offs involved.
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Watch on YouTubeWhat Is a Covered Call?
A covered call is an options strategy where you own 100 shares of a stock or ETF and sell one call option against those shares.
Own 100 Shares
+
Sell 1 Call Option
= Covered Call
Why Is It Called "Covered"?
It is called a covered call because you already own the shares that may need to be sold if the option is assigned.
Your 100 shares "cover" the obligation created by selling the call option.
Step 1
Own 100 Shares
One standard U.S. equity option contract typically represents 100 shares.
To sell a traditional covered call, you first own 100 shares of the stock or ETF.
Step 2
Sell a Call
Once you own the shares, you can sell one call option against them.
When you sell the call, you choose a strike price and an expiration date.
What Do You Receive?
When you sell the call option, you collect premium.
Premium is the money paid to you for selling the option and accepting the obligations that come with the contract.
Sell Call
Collect Premium
Beginner Example
Let's use a simple example to see how a covered call works.
You Own
100 Shares
at $50 per share
You Sell
$55 Call
1 contract
You Collect
$100
premium
What Happens Next?
For this beginner example, there are two main outcomes to understand.
Stock Stays Below $55
If the stock remains below the $55 strike through expiration, the call may expire worthless.
✓ You keep the premium
✓ You still own your shares
Stock Goes Above $55
If the stock moves above the $55 strike, assignment may occur.
If assigned, your 100 shares are sold at the $55 strike price.
You still keep the premium you received.
What Does "Called Away" Mean?
When a covered call is assigned, your shares may be "called away."
This simply means your shares are sold at the strike price specified in the option contract.
In our example:
100 shares × $55 strike = $5,500 received from selling the shares, plus the premium already collected.
Why Sell a Covered Call?
One reason investors use covered calls is to generate option premium from shares they already own.
Potential Benefits
- ✓ Collect premium from shares you own
- ✓ Establish a price where you are willing to sell
- ✓ Generate additional income from a stock position
The Trade-Off
The premium does not come without a trade-off.
While the call is open, you may have to sell your shares at the strike price even if the stock rises much higher.
Example:
You sell the $55 call, but the stock rises to $65. Assignment could still require you to sell the shares for $55.
The covered call can limit your upside while the option is open.
Important Risk: The Stock Can Fall
Selling a covered call does not eliminate the risk of owning the stock.
If the stock falls significantly, you can still lose money on the shares you own.
The premium provides only limited downside protection.
A small amount of premium cannot protect you from a large decline in the underlying stock.
When Might Someone Use a Covered Call?
A covered call may make sense for someone who already owns shares, is willing to sell those shares at a chosen strike price, and wants to collect premium.
Neutral
You do not expect the stock to make a major move higher.
Slightly Bullish
You believe the stock may rise but are comfortable selling at your selected strike.
Before Selling a Covered Call, Ask:
"Would I actually be happy selling my shares at this price?"
Quick Recap
Own 100 shares.
Sell one call option.
Choose a strike price and expiration.
Collect premium.
Below the strike, you may keep the shares.
Above the strike, your shares may be called away.
You still have downside risk from owning the stock.
OptionEdge Academy
Sell Options. Build Income. Repeat.
Understanding how covered calls work is another important step toward understanding option-selling strategies.
Watch the Full Lesson
Watch the OptionEdge Covered Call lesson for a complete beginner-friendly walkthrough.
Watch on YouTubeEducational Disclaimer: This content is for educational purposes only and is not financial, investment, tax, or legal advice. Options involve risk and may not be suitable for every investor. Always understand the risks and obligations of an options position before entering a trade.