A covered call is an options strategy where you own at least 100 shares of a stock and sell one call option against those shares to collect premium income. You keep the premium no matter what, and in exchange you agree to sell your shares at the strike price if the stock rises above it by expiration. It is one of the most conservative ways to use options, which is why income investors and retirees use it to squeeze extra yield out of stock they already plan to hold.
What is a covered call, exactly?
The trade has two pieces working together. The “covered” part is your 100 shares of stock. The “call” part is a single short call option you sell against them. Because you already own the shares, you can deliver them if the option is exercised, so the position is fully covered and carries no naked-short risk on the upside.
You collect the option premium up front. That cash is yours to keep immediately. In return you cap your upside at the strike price: if the stock finishes above the strike at expiration, your shares get “called away” at that price and you miss any gains beyond it. If the stock finishes below the strike, the call expires worthless and you still own your shares plus the premium.
How a covered call works, step by step
- Own (or buy) 100 shares of a stock per contract you intend to sell.
- Choose a strike price above the current share price (out of the money) for a balance of income and room to run.
- Choose an expiration, commonly 30 to 45 days out, where time decay works hardest in your favor.
- Sell one call contract and collect the premium, which is credited to your account right away.
- Wait for expiration. If the stock stays below the strike, the call expires and you can sell another one. If it finishes above the strike, your shares are sold at the strike and you keep the premium plus the gain up to that strike.
A worked covered call example
Suppose you own 100 shares of a stock trading at $50. You sell one 30-day call at the $55 strike for a premium of $1.50 per share, which is $150 of income for the contract. Here is how the three numbers that matter shake out.
| Metric | Formula | This example |
|---|---|---|
| Premium collected | Premium × 100 | $150 |
| Breakeven price | Stock cost − premium | $50.00 − $1.50 = $48.50 |
| Max profit (if assigned) | (Strike − cost) + premium | ($55 − $50) + $1.50 = $6.50/share, or $650 |
| Static return (stock flat) | Premium ÷ stock cost | $1.50 ÷ $50 = 3.0% in 30 days |
| If-called return | Max profit ÷ stock cost | $6.50 ÷ $50 = 13.0% |
| Max loss | Cost − premium (stock to $0) | $48.50/share, or $4,850 |
The 3.0% static return over 30 days annualizes to roughly 36% if you could repeat it every month, though that assumes the stock cooperates every cycle, which it will not always do. Run your own numbers on the covered call calculator to see premium income, breakeven, and annualized return side by side.
Breakeven, max profit, and max loss
- Breakeven: your stock cost basis minus the premium received. The premium lowers your effective entry price and gives a small cushion against a dip.
- Maximum profit: capped. It equals the gain from your cost up to the strike, plus the premium. You cannot earn more than this even if the stock doubles.
- Maximum loss: large but not unique to this strategy. Your downside is the same as owning the stock, reduced only by the premium you collected. If the shares go to zero you lose your cost basis minus the premium.
When to sell a covered call
- You are neutral to mildly bullish on a stock you already own and are happy to hold.
- You would be content to sell the shares at the strike price if they get called away.
- Implied volatility is elevated, which fattens the premium you collect.
- You want to generate recurring income from a long-term holding without selling it outright.
Risks and downsides to understand first
- Capped upside. If the stock rockets past your strike, you still sell at the strike and forgo the rest of the move. This is the most common regret with covered calls.
- Full downside. The premium offers only a thin cushion. A large drop in the stock still hurts, the same as it would for any shareholder.
- Early assignment. American-style options can be assigned before expiration, especially right before an ex-dividend date when the call is in the money.
- Opportunity cost on takeovers or gaps. A sudden buyout or earnings gap above your strike caps you out of a windfall.
Covered call vs cash-secured put
These two strategies are mirror images that produce a similar payoff. A covered call generates income on shares you own. A cash-secured put generates income while you wait to buy shares at a lower price.
| Feature | Covered call | Cash-secured put |
|---|---|---|
| You start with | 100 shares | Cash to buy 100 shares |
| Outlook | Neutral to mildly bullish | Neutral to mildly bullish |
| Income source | Sold call premium | Sold put premium |
| If exercised | You sell your shares at the strike | You buy shares at the strike |
| Best when | You own stock you would sell higher | You want to own stock lower |
Investors often run them in sequence, known as the wheel: sell a cash-secured put to get assigned shares, then sell covered calls on those shares until they are called away, and repeat.
Rolling and assignment
If the stock approaches your strike before expiration and you want to keep the shares, you can “roll” the call: buy back the current call and sell a later-dated or higher-strike call, usually for a net credit. If you are happy to let the shares go, simply allow assignment to happen. A more capital-efficient variant of this strategy replaces the 100 shares with a deep in-the-money LEAPS call, known as the poor man’s covered call.
Frequently asked questions
Is a covered call a safe strategy?
It is one of the lower-risk option strategies because you already own the shares, so there is no unlimited risk. The main risks are giving up upside above the strike and the normal downside of holding the stock, which the premium only partly cushions.
What happens if the stock goes above the strike price?
Your shares are likely to be called away at the strike. You keep the premium plus the gain up to the strike, but you do not participate in any move above it. You can avoid assignment by rolling the call before expiration.
How much money can you make selling covered calls?
Income depends on the premium, which is driven by the stock price, the strike you choose, time to expiration, and implied volatility. A common target is 1% to 3% of the share price per month, but that is not guaranteed and varies with market conditions.
Do I keep the premium if the option expires worthless?
Yes. The premium is credited to your account the moment you sell the call and is yours to keep regardless of what the stock does. If the call expires worthless you keep both the premium and your shares, and you can sell another call.
