Covered call
Hold stock and write a call against it. Reduces your cost basis and generates income, but caps upside above the strike. Most common income strategy.
How a covered call works
A covered call is two positions held together: 100 shares you already own, and one call sold against them. The premium you collect is yours immediately. In exchange you have agreed to sell those shares at the strike price if the buyer exercises, which caps your upside at that strike.
The word "covered" matters. Selling a call on its own carries theoretically unlimited risk, because you would have to buy shares at any price to deliver them. Owning the shares removes that — the worst case is that your stock gets called away at a price you chose in advance. What you are really selling is the portion of the upside above the strike.
This makes it an income position rather than a directional one. It performs best when the stock is flat to modestly higher, and the premium provides a small cushion against a decline. It does not protect you in a real selloff: a stock that falls 30% falls 30% whether or not you collected a dollar of premium.
A worked example
You own 100 shares of XYZ bought at $100, a $10,000 cost basis. XYZ trades at $100 today. You sell one $105 call expiring in 30 days and collect $2.00 per share.
The $110 outcome is the one to sit with. You made $700 where holding the shares outright would have made $1,000. The $300 difference is what you sold — and you sold it before you knew whether you would want it.
When a covered call fits — and when it doesn't
- You are neutral to mildly bullish on a stock you already hold and intend to keep.
- You would genuinely be content selling at the strike — treat it as a limit order you get paid to place.
- Implied volatility is elevated, so the premium you collect is worth the upside you give up.
- You expect a large move up. Capping the upside is the whole cost of the trade and a sharp rally is exactly when it hurts.
- You are holding through an earnings report or another binary event where the stock could gap well past the strike.
- The premium is negligible. If the credit is a rounding error you have given away the upside for nothing.
Common questions
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