You own 100 shares of a stock you like. The price has drifted sideways for months, and you wonder if there is a way to squeeze a little extra income out of it without selling. That question is exactly what the covered call strategy was built to answer.
So what is a covered call, and is it actually worth running on your own portfolio? At a basic level, a covered call is a trade where you sell someone else the right to buy your shares at a set price by a set date, in exchange for a cash premium today. The trade-off is simple but real: you collect income now, but you cap how much you can gain if the stock rallies hard.
What Is a Covered Call in Plain Terms
A covered call has two parts. You own at least 100 shares of a stock, and you sell, or "write," one call option against those shares.
The call option is a contract. It gives the buyer the right, but not the obligation, to purchase your 100 shares at a fixed price called the strike, anytime before the contract expires. You receive a premium upfront for taking on that obligation, and that premium is yours to keep no matter what happens next.
The word "covered" is the key part. Because you already own the underlying shares, you are covered if the buyer exercises the option. That makes it one of the lower-risk options strategies, though it is not risk-free.
How a Covered Call Actually Plays Out
Let's run through a simple example. Imagine you own 100 shares of a stock trading at $50. You sell one call with a $55 strike that expires in 30 days, and you collect $1.50 per share, or $150 in total premium.
Three scenarios can unfold by expiration day. If the stock stays below $55, the option expires worthless and you keep the shares plus the $150. If the stock closes between $55 and $56.50, you keep your shares (or get "called away" near break-even) and still come out ahead by the premium. If the stock rallies past $56.50, the buyer is likely to exercise. You sell your shares at $55, you keep the $150 premium, but you miss out on any upside above $55.
In other words, the income is real, but so is the ceiling on your gains.
Why Income-Focused Investors Like Covered Calls
The appeal is steady cash flow. On a portfolio of dividend stocks or index ETFs like a broad S&P 500 ETF, covered calls can add a few percent in annualized premium on top of dividends.
The strategy also works well when you have neutral-to-slightly-bullish expectations. If you believe the stock will mostly drift, the call you sold likely expires worthless, and you can repeat the trade next month. Some traders run weekly or monthly cycles indefinitely, often called "the wheel" strategy.
The Real Risks of Selling Covered Calls
The biggest risk is upside risk, not downside. If the stock skyrockets, you watch the gains pass you by because you locked in a $55 sale price. You still come out ahead, just by far less than buy-and-hold would have produced.
The second risk is the same downside risk you already had as a shareholder. If the stock drops sharply, the premium offsets only a small portion of your losses. A covered call is not a hedge, it is an income enhancement.
The third is taxes. Short-term option premiums and any forced sale of shares can trigger short-term capital gains rates, which are higher than long-term rates. The IRS rules around qualified covered calls are subtle, so talk to a tax professional before running this strategy in large size.
Choosing a Strike Price and Expiration
The two main choices are how far above the current price you set the strike, and how many days until expiration.
A strike close to the current price brings in a fat premium but increases the odds of your shares getting called away. A strike further out of the money brings in less premium but lets you keep more of any rally. Most newer covered call traders pick a strike around 3 to 7% above the current price.
For expiration, shorter contracts of 30 to 45 days tend to deliver the most premium relative to time decay, which is why monthly cycles are so common.
Where to Run Covered Calls
Most major brokerages support covered calls once you complete an options-trading approval form. Robinhood offers commission-free options trading with a clean mobile interface, real-time pricing, and a streamlined approval process, as our full Robinhood review explains. Higher-tier traders who are already running options often pair the same account with Robinhood futures or look at whether they day trade on Robinhood under PDT rules. Options trading involves substantial risk and is not suitable for every investor, and approval levels and features can change. Terms and conditions apply.
Robinhood
Robinhood
Robinhood is a trading platform that brings stocks, ETFs, options, futures, prediction markets, crypto, and retirement accounts together in one app.
Standout feature
One platform for stocks, ETFs, options, futures, prediction markets, and crypto
Fees
$0 commission on stocks, ETFs, and options.
Pros
Zero-commission trading on stocks, ETFs, and options
Cons
Best perks (high APY, lower margin rates) require Gold subscription ($5/month)
Other common platforms include Fidelity, Schwab, E*Trade, Tastytrade, and Interactive Brokers. The right choice depends on your account size, the analytics you want, and whether you prefer mobile or desktop tools. The E*TRADE vs Robinhood and Webull vs Robinhood comparisons go deeper on the options-trading side of each platform.
Whichever platform you pick, start small. One contract on a stock you know well is plenty for your first few trades while you learn how the premiums move with volatility, time, and price.
Covered Calls Compared to Other Income Strategies
Covered calls are one of several income approaches. Cash-secured puts work in a similar way and let you collect premium for agreeing to buy a stock at a lower price. Dividend stocks pay you for holding the share itself. Bond ladders deliver steady coupon income with very different risk.
Covered calls sit in the middle of the risk spectrum. You retain the downside of stock ownership but trade some upside for steady premium. They work best alongside a long-term plan, not as a standalone way to grow wealth.
Frequently Asked Questions
How much money can I make with covered calls?
Monthly premiums commonly run 0.5 to 2% of the share value, depending on the stock's volatility and how close the strike is to the current price. Annualized, that can add up to a meaningful return, but a single big rally in the stock can wipe out a year of premium gains, since your upside is capped. Results vary by market conditions and individual trades.
What level of options approval do I need?
Most brokerages categorize covered calls as Level 1 or Level 2 options trading, which is the lowest approval level and usually the easiest to qualify for. You typically need to fill out a short questionnaire about your income, net worth, and investing experience.
Can I lose more than I paid for the stock with a covered call?
No. Your maximum loss is the same as it would be if you simply owned the shares, minus the premium you collected. The covered call cannot push you below zero on that position, since the call obligation is fully backed by the shares you already own.
What happens if my shares get called away?
If the buyer exercises the option at expiration, your broker sells 100 shares per contract at the strike price and credits the proceeds to your account. You then no longer own those shares, but you keep the original premium. You can buy the stock back later if you want to restart the cycle.
