Covered Calls Explained

Covered calls are one of the most popular options strategies for income investors. Let's break down exactly how they work.

The Mechanics of a Covered Call

A covered call involves two positions:

Long stock - You own 100 shares (or multiples of 100)

Short call - You sell a call option against your shares

Profit and Loss Diagram

Your maximum profit is limited to: (Strike Price - Stock Purchase Price) + Premium Received

Your maximum loss is: Stock Purchase Price - Premium Received (if stock goes to $0)

Step-by-Step: Selling Your First Covered Call

Step 1: Own 100 Shares

You must own at least 100 shares of an optionable stock.

Step 2: Choose Your Strike Price

Higher strike = Lower premium, higher chance of keeping shares

Lower strike = Higher premium, higher chance of assignment

Step 3: Choose Expiration Date

Weekly options = Higher annualized return, more management

Monthly options = Lower annualized return, less work

30-45 days is the sweet spot for most traders

Step 4: Sell to Open

Place a "Sell to Open" order for a call option at your chosen strike and expiration.

Step 5: Wait and Monitor

Monitor your position. At expiration:

Stock below strike → Keep shares and premium

Stock above strike → Shares called away at strike price