What Is a Covered Call? A Complete Beginner's Guide

Learn what a covered call is, how it works, and why investors use this options strategy to generate income from stocks they already own.

What Is a Covered Call?

A covered call is an options trading strategy where you sell a call option against shares of stock you already own. In exchange for selling this option, you receive a premium — cash that is yours to keep regardless of what happens next.

How It Works

  1. You own 100 shares of a stock (e.g., AAPL at $185)
  2. You sell 1 call option with a strike price above the current price (e.g., $190 strike, 30 days out)
  3. You collect the premium immediately (e.g., $2.50 per share = $250)

The Two Outcomes

Option expires worthless (most common): The stock stays below $190. You keep your shares, keep the $250 premium, and can sell another call next month.

Option gets assigned: The stock rises above $190. You sell your shares at $190 (a price you were happy with), keep the $250 premium, plus any capital gains from $185 to $190.

Why Investors Love Covered Calls

  • Generate income from stocks you already hold
  • Reduce risk by collecting premiums that offset potential losses
  • Repeatable strategy — sell calls month after month
  • Works in flat or slightly bullish markets where stocks don't move dramatically

Key Terms to Know

  • Strike price: The price at which you agree to sell your shares
  • Expiration date: When the option contract expires
  • Premium: The cash you receive for selling the option
  • OTM (Out of the Money): When the strike price is above the current stock price
  • Delta: Measures the probability the option will be in the money at expiration

Getting Started

The best way to learn covered calls is to model the outcomes before placing a trade. Tools like Covered Calls 101 let you see real-time pricing, calculate potential returns, and compare different strike prices and expiration dates — so you can make informed decisions.

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