What is a Covered Call? Understanding the Basics

If you’re looking for a way to generate income from your stock portfolio, a covered call may be just what you need. A covered call is an options strategy that involves selling call options on a stock you own, in exchange for a premium. In this post, we’ll explain the basics of covered calls and how they work.

What is a Covered Call?

A covered call is an options strategy that involves selling call options on a stock you own. When you sell a call option, you’re essentially giving someone else the right to buy your stock at a certain price (the strike price) within a certain time frame (the expiration date). In exchange for this right, the buyer pays you a premium.

Why Sell a Covered Call?

There are a few reasons why someone might choose to sell a covered call. One reason is to generate income. When you sell a call option, you receive a premium, which can be a source of income. If the stock price stays below the strike price, the option will expire worthless and you get to keep the premium.

Another reason to sell a covered call is to potentially profit from a stock you own without having to sell it. If the stock price goes up and the option is exercised, you sell your stock at the strike price, which is a profit. If the stock price stays below the strike price, you get to keep your stock and the premium.

How to Sell a Covered Call

To sell a covered call, you need to own at least 100 shares of the stock you want to sell the call option on. You also need to have a brokerage account that allows options trading. Here are the basic steps to sell a covered call:

• Choose a stock you own and want to sell a call option on.
• Choose a strike price and expiration date for the option.
• Sell the call option through your brokerage account.
• If the option is exercised, sell your stock at the strike price.

Risks of Selling a Covered Call

While selling a covered call can be a profitable strategy, there are some risks involved. One risk is that the stock price may drop, which can lead to losses. If the stock price drops below the strike price, the option will likely expire worthless, but you’ll still have a loss on the stock.

Another risk is that the stock price may rise significantly, which can limit your potential profits. If the stock price rises above the strike price, the option will be exercised, and you’ll sell your stock at the strike price, missing out on any further gains.

Weekly Market Update

Each week, we send out a free newsletter to subscribers that provides some commentary on market events and includes a table of relevant rates for investors. We also provide links to other resources our family office is using. Sign up here: