Covered calls are an options strategy where you sell someone else the right (but not the obligation) to buy your stock from you at a set price (called the strike price) before a certain date (expiration), in exchange for cash today (called a premium).
You keep the premium no matter what happens.
1. What You Need:
- Own 100 shares of a stock.
- Be willing to sell those shares if the stock price rises above a set price (your strike).
This is why it’s called “covered” — you already own the shares, so if the buyer exercises, you can just hand them over.
2. A Real Example: Selling a Covered Call on Apple (AAPL)
You own 100 shares of Apple at $170 per share.
You sell 1 Call Option:
- Strike price: $180
- Expiration: 1 month from now
- Premium collected: $2.50 per share = $250 total (because options cover 100 shares)
Two Outcomes:
| Scenario | What Happens |
|---|---|
| AAPL stays below $180 by expiration | You keep the $250. Your stock remains yours. |
| AAPL goes above $180 | You must sell at $180, even if AAPL hits $190. You still keep the $250 premium. |
3. Profit Math
If Apple stays below $180:
- Gain = $250 (premium) + any appreciation below $180.
If Apple rises above $180:
- Your profit is capped:
- ($180 – $170) × 100 shares = $1,000 (capital gain)
- + $250 (premium) = $1,250 total
Even if Apple rockets to $200 — you still only get $1,250.
4. Why Do This?
- Generate extra income on stocks you already own.
- Boost returns if you think a stock will go sideways or slightly up.
- Lower breakeven point: your effective cost basis drops (e.g., $170 – $2.50 = $167.50).
5. The Risks
- Opportunity Cost: If the stock skyrockets, you’re forced to sell at the lower strike price and miss out on bigger gains.
- Still exposed to downside: If Apple drops to $160, you still lose money on your shares (but the $250 premium cushions it a bit).
6. How to Find Good Covered Call Setups
Look for:
- Stocks you already own or wouldn’t mind selling.
- Strike prices about 5–10% above the current price.
- Expiration dates about 2–6 weeks away (good time decay).
7. Real Numbers — Covered Call Calculator Snapshot
| Metric | Value |
|---|---|
| Stock price (current) | $170 |
| Strike price | $180 |
| Premium received | $2.50 per share |
| Potential max gain | $12.50 per share ($1,250) |
| Max gain % (on cost basis) | ~7.35% in 1 month |
Not bad for a 1-month strategy!
Bonus Tip:
You can repeat covered calls monthly — “renting out” your stock for consistent income.
If you own boring stocks (like Coca-Cola, Verizon, AT&T), covered calls can turn them into cash machines.
Final Word:
Covered calls are like getting paid rent for stocks you own — but you might have to sell if someone “buys the house” at a pre-agreed price.