Covered Call Strategy
Sell a call against owned shares to generate income and reduce cost basis.
Premium received + (strike - stock purchase price)
Stock can go to zero (minus premium received)
Stock purchase price - premium received
neutral
📖 What is the Covered Call?
A covered call involves owning 100 shares of stock and selling a call option against it. This generates premium income but caps your upside at the strike price. It's one of the most popular income strategies, ideal for investors who are willing to sell shares at the strike and want to generate returns on existing holdings.
🔧 How to Set Up
BUY STOCK @ N/A
Own 100 shares of the underlying stock
SELL CALL @ Above current price (OTM)
Sell to open a call option
💡 Example Trade
Underlying: MSFT @ $380
Own 100 MSFT shares, Sell 1 $400 call for $5 premium
$2,500 ($20 appreciation + $5 premium × 100)
Stock to zero minus $500 premium = $37,500
$375 ($380 - $5 premium)
📊 Greeks Profile
Net positive (100 from stock minus call delta). Still bullish overall.
Negative from short call.
Positive. Time decay works in your favor.
Negative. Falling IV helps your position.
❓ Frequently Asked Questions
What strike should I choose for covered calls?
Choose a strike you'd be comfortable selling at. OTM strikes (5-10% above current price) balance premium income with room for appreciation. Closer strikes offer more premium but higher assignment probability.
What if my shares get called away?
You'll sell shares at the strike price and keep the premium. This is often a profitable outcome. You can then sell cash-secured puts to potentially buy back shares at a lower price.
Pros & Cons
- ✓Generates income on existing positions
- ✓Lowers cost basis of stock ownership
- ✓Provides small downside cushion (premium received)
- ✓Simple and widely used strategy
- ✗Caps upside if stock rallies significantly
- ✗Doesn't protect against large downside moves
- ✗May have shares called away at inopportune time
- ✗Opportunity cost if stock soars past strike
Ideal Conditions
- →Neutral to slightly bullish on the stock
- →Willing to sell shares at the strike price
- →Want to generate income on existing holdings
- →IV is elevated (more premium to collect)
💡 Pro Tips
- Sell calls at strikes you'd be happy to sell shares at
- Use 30-45 DTE for optimal theta decay
- Roll up and out if the stock approaches your strike
- Avoid selling calls during low IV periods