What is a Covered Call?
A covered call is one of the most popular option strategies for stock owners. You sell call options on stocks you already own and collect a premium.
Simply explained:
You own 100 shares and sell the right to buy these shares at a specific price (strike). You receive money immediately (premium). If the stock stays below the strike, you keep both shares and premium.
When to Use Covered Calls?
Neutral Market Outlook
You expect your stock to move sideways or rise only slightly.
Additional Income
You want to generate regular income from your stocks.
Cost Reduction
You want to lower your cost basis through premium income.
Step-by-Step Guide
Own the Stock
You must own at least 100 shares of the company. One call option contract always covers 100 shares.
Example: You own 100 Apple shares at €180 = €18,000 total value
Choose Strike Price
Choose a strike price above the current price. The higher the strike, the more likely you keep the shares.
Current Price: 180€
Strike Choice: 190€ (+5.5%)
→ Stock must rise above €190 to be "called away"
Determine Expiration
Choose the option expiration date. Typical is 30-45 days.
Short Term
7-14 days: Less premium, more flexibility
Optimal
30-45 days: Best balance
Long Term
60+ days: More premium, less control
Sell Call Option
Sell the call option "Sell to Open". You immediately receive the premium in your account.
Premium Calculation:
Apple €190 call, 30 days expiration = €3.50 premium per share
Income: €350 (€3.50 × 100 shares)
Wait and Monitor
Now there are three possible scenarios until expiration:
Scenario 1: Price Below Strike (Ideal)
Stock stays below €190 → Option expires worthless → You keep shares + €350 premium
Scenario 2: Price Above Strike
Stock rises above €190 → Your shares are sold at €190 → You have profit + premium
Scenario 3: Buy Back Option
If stock rises strongly and you want to keep shares: Buy back the option ("Buy to Close")
Complete Example
Apple Covered Call Trade
Starting Position
- ▸ 100 Apple shares at €180
- ▸ Total value: €18,000
- ▸ Expectation: Sideways movement
Trade Details
- ▸ Sell: 1 × Apple €190 call
- ▸ Expiration: 30 days
- ▸ Premium: €3.50 per share
Result After 30 Days
Stock price at expiration: 185€
▸ Option expires worthless (€185 < €190)
▸ You keep all 100 shares
▸ Stock profit: +€500 (€5 × 100)
▸ Premium income: +€350
Total profit: €850 (+4.7% in 30 days)
≈ 57% annualized return!
Pros and Cons
Advantages
- ▸Regular income: Monthly premium income possible
- ▸Lower cost basis: Reduce your entry price
- ▸Low risk: More conservative than pure stock ownership
- ▸Flexibility: You can buy back anytime
Disadvantages
- ▸Limited profit: Profit is capped at strike price
- ▸Shares can be sold: On strong rally you lose the shares
- ▸Full downside risk: Premium provides only partial protection
- ▸Time commitment: Requires regular monitoring
Tips for Success
1. Choose the Right Strike
Out-of-the-Money (OTM) calls: 5-10% above current price. This gives you room for price appreciation.
2. Timing Matters
Sell calls during high IV (before earnings, during market volatility). Premiums are higher then.
3. Roll Regularly
When the option expires worthless, immediately sell a new one. Maximize your premium income!
4. Diversify
Use covered calls on multiple stocks. Spread your risk and income sources.
Start with Covered Calls!
Use Libertex for professional options trading with low fees and excellent tools!
Open Account NowRisk Warning: Covered calls are a relatively conservative strategy but still carry risks. The stock price can fall, and the premium provides only limited protection. Make sure you fully understand the strategy before applying it.