What is a Covered Call?

The 30-Second Version

A covered call is when you own 100 shares of a stock and sell someone the right to buy those shares from you at a specific price before a specific date. In exchange, you get paid upfront — that's your premium .

It's called "covered" because you already own the shares. You're not making a naked bet — you have the stock to back it up.

A Real Example (No Jargon)

Now one of two things happens:

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  NVDA stays below $150: The option expires worthless. You keep your 100 shares AND the $250. Free money.
• →
  NVDA goes above $150: Your shares get "called away." You sell at $150 (a $10/share profit) and still keep the $250 premium. You profit, but miss gains above $150.

The Three Numbers That Matter

Why Would You Sell Covered Calls?

• •
  Generate income: Earn 1-3% monthly on stocks sitting in your portfolio.
• •
  Reduce your cost basis: Each premium collected lowers your effective purchase price.
• •
  Set a target sell price: If NVDA at $150 sounds good to you, get paid to wait.

The Honest Tradeoff

This is why covered calls work best when you'd be happy to sell at the strike anyway. Don't sell calls on stocks you think are about to double.

Who Should Use Covered Calls?

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  Long-term investors with stocks they're willing to part with at the right price
• ✓
  Anyone looking to generate consistent income from a portfolio
• ✓
  Investors who think a stock will trade sideways for a while
• ✗
  People who can't handle selling early if the stock surges

Getting Started

1. Own at least 100 shares — One options contract = 100 shares
2. Pick a strike you'd sell at — Be honest about the price where you'd happily part with the stock
3. Choose an expiration — Most income traders use 2-6 weeks out
4. Sell to open — In your broker, select "Sell to Open" on the call option

Common Mistakes to Avoid

• ✗
  Selling calls on stocks you love too much — If you can't stomach selling AAPL at any price, don't write calls on it
• ✗
  Selling right before earnings — Earnings create unpredictable moves. Skip that week.
• ✗
  Going too aggressive for premium — Low strikes pay more but you'll get called away often. Find your balance.

What's "Delta"? (The One Greek You Need)

Delta tells you roughly the probability your shares will be called away.

Lower delta = safer but lower premium. Most income traders target 0.15-0.30 delta.