A covered call means you own the underlying shares and sell a call option against them. You collect the premium immediately. In exchange, you agree to sell your shares at the strike price if the option is exercised.
Example
You own one lot of a stock trading at 500. You sell the 530 call expiring next month for a premium of 8 per share. Three outcomes are possible:
- Stock stays below 530: the call expires worthless and you keep the 8 premium plus your shares.
- Stock rises above 530: your shares are effectively sold at 530. Your total gain is capped at 30 + 8 per share.
- Stock falls: the premium cushions the loss by 8 per share, but you still carry the downside of owning the stock.
When it fits
Covered calls work best on stocks you are happy to hold for the long term and would also be comfortable selling at the strike. They suit flat or gently rising markets.
The trade-offs
- Upside is capped above the strike price.
- Downside protection is limited to the premium received.
- Selling calls right before earnings or a dividend can lead to early assignment in markets that allow it.
This article is for education only and is not financial advice. Options involve risk and are not suitable for every investor.