RiskPicksWhat is a Covered Call?
A covered call is when you own 100 shares of a stock and sell (write) a call option against those shares. You collect the option premium upfront as income. In exchange, you agree to sell your shares at the strike price if the stock reaches that level before expiration.
How it works
- You own 100 shares of AAPL at $150
- You sell a call option with a $160 strike price expiring in 30 days for $3.00 premium
- You collect $300 ($3.00 x 100 shares) immediately
- If AAPL stays below $160: the option expires worthless. You keep your shares and the $300. You can sell another call next month
- If AAPL rises above $160: your shares get called away (sold) at $160. You keep the $300 premium plus the $10/share gain ($150 to $160). Total profit: $1,300. But you miss any gains above $160
Why traders use covered calls
- Income: generate cash from shares you already own and plan to hold
- Partial downside protection: the premium you collect reduces your cost basis. If AAPL drops $3, the premium offsets the loss
- Works in flat markets: when a stock is going sideways, covered calls generate returns that buy-and-hold does not
The tradeoff
- Capped upside: if the stock rockets past your strike price, you miss the gains above that level. This is the cost of the premium income
- Still exposed to downside: if the stock crashes, the premium provides small cushion but you still take the full loss on your shares
- Requires 100 shares: at $150/share, that is $15,000 of capital tied up in one position
Covered calls are often called the "most conservative" options strategy. That is true in the sense that you already own the shares. But "conservative" does not mean risk-free. You still lose money if the stock drops significantly.