The Covered Call Strategy Explained

A covered call is one of the most conservative options strategies: you own a stock and sell a call option against it to earn the premium as income.

How it works

You hold (say) 100 shares of a stock and sell one call at a strike price above the current price. You immediately collect the premium. Two outcomes at expiry:

• Price stays below the strike — the call expires worthless; you keep your shares and the premium. Best case for income.
• Price rises above the strike — your shares get "called away" (sold) at the strike. You keep the premium but miss gains above that level.

Why use it

• Generate income on shares you’re happy to hold, in flat or mildly rising markets.
• Lower your effective cost — the premium cushions small declines.

The trade-off

The cost is capped upside — if the stock rockets, you’ve given away the gains above your strike. So covered calls suit stocks you expect to move sideways or up modestly, not ones you think will surge.

Points to note

• It’s "covered" because you own the underlying — much lower risk than selling a naked call.
• You still bear the full downside of holding the stock (minus the small premium cushion).
• Watch assignment, dividends and transaction costs.

A covered call is a sensible first options strategy for stockholders — but it’s income in exchange for giving up big rallies. Options carry risk; learn the basics in our options guide. Education only, not advice.