The covered call
The covered call is the most widely used options strategy, and the usual first trade for a stock owner. You own 100 shares and sell one call against them, collecting premium. In exchange for that income, you cap your upside above the strike. It is a way to get paid for a stock you already hold.
How it is built
Two pieces: long 100 shares (your existing position) and one short call at a strike above the current price. Here the stock is at $100 and you sell the $105 call for $2. That $2 premium is yours to keep no matter what. If the stock stays below $105, the call expires worthless and you keep the shares and the premium. If it rises above $105, your shares are called away at $105 — you still profit, but you gave up the gains above the strike.
| Outlook | Neutral to modestly bullish |
|---|---|
| Max profit | (Strike − purchase price) + premium = $7/share at or above $105 |
| Max loss | Substantial — the stock can fall to zero, cushioned only by the $2 premium |
| Breakeven | Stock purchase price − premium = $98 |
| Time decay (theta) | Works for you — you are short the call |
Stock ends at $103: the $105 call expires worthless. You keep your shares (now worth $103), plus the $2 premium — effectively $105 of value on a $100 cost. Stock ends at $112: you are assigned and sell at $105. You made $5 on the shares plus $2 premium = $7, but forfeited the $7 of gains above $105. The covered call always wins in calm-to-mild markets and always underperforms a runaway rally.
When to use it
Use a covered call when you are neutral to mildly bullish on a stock you own and happy to sell it at the strike. It suits sideways or slowly rising markets, and it pairs especially well with elevated implied volatility — richer premiums mean you are paid more for the same capped upside. This is where reading volatility matters: selling calls when implied volatility is high, not low, is what separates a good covered call from a mediocre one.
Common pitfalls
Selling calls on a stock you’re not willing to lose. If assignment would upset you — taxes, conviction, a dividend — choose a higher strike or skip the trade.
Ignoring the downside. The premium cushions only a small drop. A covered call is not protection; if the stock falls hard, you still own it.
What to do with this
Think of the covered call as renting out your shares: you collect income now in exchange for a ceiling on gains. Its risk profile is identical to a cash-secured put — the next lesson — which does the same thing from the other side, getting paid to buy.
The mirror-image income trade is the cash-secured put — get paid to buy a stock you want.
Next lesson · continue the courseOn to the cash-secured put →