Covered Call Strategy: Generate Income from Stocks You Own

Learn how to sell covered calls to generate consistent monthly income from your stock portfolio. Complete guide with real examples, risk management, and when to use this popular income strategy.

Beginner-Friendly

1-3% Monthly Returns

Low Risk

TL;DR - Quick Summary

Covered calls = Own 100 shares + Sell a call option. You collect premium income (typically 1-3% monthly). If stock stays below strike, you keep premium and shares. If stock rises above strike, shares are called away at strike price (you still profit). Best for neutral-to-slightly-bullish outlook on stocks you own. Main risk: missing big upside moves. Perfect for generating income from long-term holdings.

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What is a Covered Call?

A covered call is an options strategy where you own at least 100 shares of stock and sell (write) one call option contract against those shares. You're "covered" because you own the underlying stock.

By selling the call, you collect premium income immediately. In exchange, you give the buyer the right to purchase your shares at the strike price before expiration. It's like agreeing to sell your stock at a certain price and getting paid upfront for that agreement.

Simple Example

You own: 100 shares of Apple (AAPL) purchased at $170

Current price: AAPL is at $180

Action: Sell 1 AAPL $185 call expiring in 30 days

Premium collected: $3.50 per share = $350 total

You just generated $350 in income! If AAPL stays below $185, you keep the premium and your shares. If it goes above $185, you sell at $185 (still a $15/share gain) plus keep the $3.50 premium.

How Covered Calls Work: Step-by-Step

Own or Buy the Stock

You must own at least 100 shares (or multiples of 100). Each options contract covers 100 shares. Buy quality stocks you're comfortable holding long-term.

Choose Your Strike Price

Select a strike price above the current stock price (out-of-the-money call). The strike should be at a price you'd be happy to sell your shares.

Conservative: Far OTM strike (lower premium, less assignment risk)

Aggressive: Near ATM strike (higher premium, more assignment risk)

Select Expiration Date

Most traders use 30-45 days to expiration for optimal Theta decay. Weekly options give more flexibility but lower premiums. Monthly options (30-45 DTE) strike the best balance between premium and time commitment.

Sell the Call Option

Place an order to "Sell to Open" one call contract for every 100 shares you own. The premium is credited to your account immediately.

Manage Until Expiration

Three possible outcomes at expiration:

Stock below strike: Option expires worthless. You keep premium and shares. Repeat next month.
Stock at strike: May or may not be assigned. Usually expires worthless if exactly at strike.
Stock above strike: Shares called away at strike price. You keep premium + capital gain to strike.

Real Example: Covered Call on Microsoft (MSFT)

The Setup

Position: Own 100 shares MSFT

Purchase price: $350 per share

Current price: $375

Unrealized gain: $2,500

Action: Sell 1 MSFT $385 call

Expiration: 35 days

Premium: $5.80 per share

Income: $580 collected

Scenario 1: MSFT at $380 at Expiration (Most Likely)

Result: Call expires worthless (stock below $385 strike)

You keep: All 100 shares + $580 premium

Stock gain: $5 per share × 100 = $500

Total profit this month: $1,080 ($580 premium + $500 stock gain)

Next month: Sell another covered call and repeat

Scenario 2: MSFT at $395 at Expiration (Stock Surges)

Result: Shares called away at $385 strike

Sale price: $385 per share

Capital gain: ($385 - $350) × 100 = $3,500

Premium kept: $580

Total profit: $4,080 (capital gain + premium)

Downside: Missed $10/share above $385 ($1,000 opportunity cost)

Scenario 3: MSFT Drops to $360 (Stock Falls)

Result: Call expires worthless (you keep shares)

Stock loss: $15 per share × 100 = -$1,500

Premium cushion: +$580

Net loss: -$920

Premium reduced the loss but didn't eliminate it. Stock ownership = downside risk.

Greeks Analysis for Covered Calls

Understanding the Greeks helps you manage covered calls effectively:

Theta (Time Decay) - Your Friend

Positive Theta means you profit from time decay. Every day that passes, the option you sold loses value - that's money in your pocket.

Example: Theta of +$12/day means you earn $12 daily from time decay

Strategy: Sell 30-45 DTE for maximum Theta efficiency

Delta (Directional Risk)

You have net positive Delta from owning stock (+100 Delta from shares, -35 Delta from short call = +65 net Delta).

You profit when stock rises (until strike), lose when it falls

Less directional exposure than owning stock alone

Vega (Volatility) - Negative

Negative Vega means you profit when IV drops. High IV environments are ideal for selling covered calls.

Sell when IV rank > 50 for better premiums

Check IV guide before selling

Gamma - Low Impact

Gamma is negative but minimal impact for out-of-the-money covered calls. Bigger concern near expiration if stock is near strike.

Learn More About Greeks →

When to Use Covered Calls

Best Market Conditions

✓ Neutral to slightly bullish: You expect modest gains or sideways movement
✓ High IV environment: Options are expensive, premiums are fat
✓ Range-bound stocks: Stock trading in a channel, not trending strongly
✓ You'd be happy selling: Comfortable exiting at strike price
✓ Long-term holdings: Generate income while holding quality stocks

When to Avoid

✗ Strongly bullish outlook: Expecting major breakout - don't cap your upside
✗ Before earnings/catalysts: Risk of big move that caps gains
✗ Low IV periods: Premiums too small to make it worthwhile
✗ Dividend capture: Early assignment risk before ex-dividend dates
✗ Tax considerations: Could trigger short-term capital gains if assigned

Covered Call Strike Selection Guide

Choosing the right strike price is crucial - it determines your premium income and assignment risk:

Strike Type	Delta Range	Premium	Assignment Risk	Best For
Deep OTM	0.15-0.25	Low ($0.50-$1.50)	Very Low (5-10%)	Conservative, keeping shares
OTM	0.25-0.40	Medium ($1.50-$3.00)	Moderate (20-30%)	Balanced income + growth
ATM	0.45-0.55	High ($3.00-$5.00)	High (50%)	Maximum income, OK with exit
ITM	0.60-0.80	Very High ($5.00+)	Very High (70-90%)	Planning to exit position

Recommended Approach

Most profitable long-term: Sell 0.30 Delta calls (30% probability of assignment)

This strikes a balance between premium collected and keeping your shares. You'll collect meaningful income while only getting assigned occasionally. When assigned, you've made good money and can redeploy capital or rebuy the stock.

Risk Management & Common Mistakes

Risk Management Rules

1. Only sell on stocks you want to own: You have full downside risk
2. Consider buying back at 50% profit: Close at 50% of premium collected
3. Roll when necessary: Buy back and sell further dated if stock approaches strike
4. Diversify across stocks: Don't concentrate covered calls in one sector
5. Track cost basis: Know your tax implications before assignment

Common Mistakes

✗ Selling on low IV stocks: Pennies in premium, not worth the effort
✗ Selling too close to money: Getting assigned constantly, transaction costs eat profits
✗ Ignoring earnings dates: Stock gaps through strike, missed opportunity
✗ Holding losers for premiums: Collecting $200 premium on $5,000 stock loss
✗ Not having exit plan: Panic when stock moves against position

Advanced: Rolling Covered Calls

"Rolling" means buying back your current call and selling a new one with a different strike or expiration. This extends your position and can help avoid assignment or collect more premium.

Roll Up and Out (Stock Rising)

Stock approaches your strike and you want to keep shares. Buy back current call, sell a higher strike with more time.

Example:

Sold AAPL $180 call (7 DTE), stock at $179

Buy back $180 call for $2.00 (loss)

Sell $185 call 30 DTE for $3.50 (gain)

Net credit: $1.50 + extended time + higher strike

Roll Out (Extend Time)

Near expiration, stock still below strike. Buy back cheap current call, sell next month's call.

Example:

Sold MSFT $400 call (3 DTE), stock at $390

Buy back $400 call for $0.20

Sell $400 call 35 DTE for $4.80

Net credit: $4.60 for next month

When NOT to Roll

• Stock is strongly bullish - let shares be called away, deploy capital elsewhere
• Cost to roll is more than premium collected - negative credit
• Stock fundamentals have deteriorated - better to exit the position
• Tax implications favor assignment (long-term vs short-term gains)

Covered Calls vs Other Income Strategies

Strategy	Capital Required	Max Profit	Max Loss	Complexity
Covered Call	High (own shares)	Limited (strike + premium)	Substantial (stock to $0)	Easy
Cash-Secured Put	High (cash for shares)	Limited (premium)	Substantial (stock to $0)	Easy
Iron Condor	Medium (spread width)	Limited (premium)	Limited (spread width)	Moderate
Credit Spread	Low-Medium	Limited (premium)	Limited (spread width)	Easy-Moderate

Calculate Your Covered Call Income

Use our free calculator to see potential monthly income from covered calls on any stock you own.

Calculate AAPL Covered Call → Try Options Calculator

Frequently Asked Questions

What is a covered call strategy?

A covered call is when you own 100 shares of stock and sell a call option against those shares. You collect premium income from the option sale. If the stock stays below strike, you keep premium and shares. If it rises above strike, your shares are called away at strike price.

How much can you make selling covered calls?

Returns vary but typically 1-3% per month is realistic. For example, on a $10,000 stock position, you might collect $100-300 monthly. Annualized, that's 12-36% return from premiums alone, plus any stock appreciation.

What are the risks of covered calls?

The main risk is missing out on big upside moves - your shares get called away at the strike price even if the stock soars higher. You also still have downside risk if the stock crashes, though the premium provides some cushion.

When is the best time to sell covered calls?

Best when: 1) You're neutral to slightly bullish, 2) Implied volatility is high (expensive options), 3) Stock is range-bound or sideways, 4) You'd be happy selling at the strike price. Avoid when expecting major breakouts or during low IV periods.

What happens if my covered call is assigned?

Assignment means your 100 shares are sold at the strike price. You keep the option premium plus any gains from your original purchase to the strike. You can then rebuy the stock or deploy capital elsewhere.