Covered Call
A covered call means owning shares (usually 100 per contract) and selling a call option on them. The premium gives extra income, but if the price rises above the strike, the shares can be called away and the upside is capped.
A covered call turns shares you already own into a small income stream: you sell someone the right to buy them from you at a higher price, and they pay you for that right. If the stock stays flat or rises a little, you keep the premium and often the shares. The trade-off is that you give up big gains above the strike, while still carrying almost all of the stock's downside. This entry shows the payoff in each scenario.
- Category
- Derivatives
- Reading time
- 4 min
- Also called
- Covered calls, Buy-write, Covered call strategy
- Updated
Covered calls in plain words
A covered call is a call option written against an equal number of shares you already own, and its main purpose is to earn premium income.1
By selling the call you take on an obligation: if the option is assigned, you must sell your shares at the strike price.2
The strategy suits a flat or gently rising stock; the worst case is the shares losing most of their value, which the small premium barely cushions.1
How to set up a covered call, step by step
Own the shares
One standard contract covers 100 shares. See Options.
Choose a strike
Usually above today's price — the price you'd be happy to sell at. See Strike Price.
Choose an expiry
Shorter expiries pay less but decay faster. See Expiration Date.
Sell the call
Collect the premium up front. See Option Premium.
Wait for expiry
If the stock stays below the strike, the call expires and you keep shares and premium.
Or get assigned
If the stock ends above the strike, your shares are sold at the strike. See Exercise and Assignment.
Worked examples
Example 1 — Stock stays flat
+$150You own 100 shares at $50 and sell a $55 call for $1.50. At expiry the stock is still $50.
| Premium kept | $1.50 × 100 = $150 |
| Shares | Still yours, worth $5,000 |
| Return on the shares | $150 ÷ $5,000 = 3% |
Earning premium is the main point of a covered call, and a steady stock is the ideal outcome.1
Example 2 — Stock jumps, shares called away
+$650, cappedSame position, but the stock rises to $62 by expiry and the call is assigned.
| Sale at the strike | ($55 − $50) × 100 = $500 |
| Premium | $150 |
| Total | $650 |
| Gain given up above $55 | ($62 − $55) × 100 = $700 |
Assignment means you must sell at the strike, so the upside above it goes to the call buyer.2
Example 3 — Stock falls
−$650Same position, but the stock drops to $42.
| Loss on shares | ($42 − $50) × 100 = −$800 |
| Premium | +$150 |
| Net | −$650 |
The premium only softens a fall; the maximum loss is limited but substantial, up to the stock becoming worthless.1
Covered call vs just holding the stock
| Aspect | Covered call | Stock only |
|---|---|---|
| Income | Premium every cycle | Dividends only |
| Upside | Capped at strike + premium | Unlimited |
| Downside | Slightly cushioned by premium | Full |
| Best market | Flat or gently rising | Strongly rising |
When traders use covered calls
Extra income
Earning premium on long-term holdings.
Planned exits
Selling calls at a price you'd sell at anyway.
Sideways markets
Making money when the stock goes nowhere.
The wheel
Alternating with cash-secured puts. See Cash-Secured Put.
Advantages and disadvantages
Advantages
- Generates regular premium income.
- Slightly lowers the effective cost of the shares.
- Simple and widely approved by brokers.
Disadvantages
- Caps upside above the strike.
- Keeps nearly all downside risk.
- Shares may be called away when you'd rather keep them.
Going deeper
Read as far as you need. Each level builds on the one before it.
Break-even
Beginner
Your break-even on the shares drops by the premium: buy at $50 and collect $1.50, and you break even at $48.50 at expiry. See Break-Even.
Time decay works for you
Intermediate
As expiry nears, time decay shrinks the short call's value, which makes it cheaper to buy back if you want to close early; rising implied volatility does the opposite.1 See Option Greeks.
Early assignment
Advanced
American-style calls can be assigned before expiry, most often just before an ex-dividend date when the call is deep in the money. See American and European Options and Ex-Dividend, Record and Payment Dates.
Common mistakes
Writing calls on stock you can't bear to sell
Assignment can happen.
Chasing the fattest premium
High premiums often mean high expected volatility — and risk.
Forgetting the downside
The premium is small next to a big drop.
Ignoring taxes
Assignment triggers a sale, which can trigger tax. See Capital Gains Tax.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A covered call sells a call against shares you own.
- You collect premium but cap your upside.
- You keep almost all of the downside.
- Assignment means selling at the strike.
- Best in flat or gently rising markets.
Frequently asked questions
Can I lose money with covered calls?
What happens if my shares are called away?
Why is it called “covered”?
Further learning
- Options
How calls and puts work.
- Option Premium
What the call buyer pays you.
- Exercise and Assignment
What happens when the call is exercised.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- OCC Options Education. Covered Call (Buy/Write) (opens in a new tab) Checked .
- FINRA. Options (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.