Covered Call Strategy
Generate regular income from your stocks. The most popular options strategy for beginners and advanced traders alike.
What is a Covered Call?
A covered call is an options strategy where you sell a call on shares you already own. You receive an immediate premium in exchange for the obligation to potentially sell your shares at the strike price.
The call is "covered" because you own the shares and can deliver them if the buyer exercises.
= Long 100 shares + Short 1 call
Profit/Loss Profile
Profit is capped (Strike + Premium), Loss is cushioned (Premium as buffer)
Step-by-Step Tutorial
How to set up a covered call - from start to finish.
Own or Buy Shares
You need at least 100 shares of a stock that has options traded on it.
Example: You own 100 shares of AAPL, current price €175.
Choose stocks you would hold long-term anyway. Covered calls work best with stable, slightly bullish stocks.
Choose Expiration Date
Choose how long you want to commit. Typical: 30-45 days.
30-45 days offers the best balance of time decay and adjustment flexibility.
Shorter duration = More work, but higher annualized return. Longer duration = Less work, more uncertainty.
Select Strike Price
The strike determines your max return and probability of shares being sold.
Strike €180 with stock at €175 = 5 strike OTM (2.9% above current price)
OTM strikes: Higher win rate + potential stock gain. ATM strikes: Higher premium, but little stock gain possible.
Sell the Call
Sell 1 call per 100 shares. You receive the premium immediately.
Sell: 1 AAPL €180 call for €2.50. You receive: €250 (€2.50 × 100).
Always use limit orders! Set the price between bid and ask.
Manage & at Expiration
Monitor the position and decide what to do at expiration.
Option expires worthless? Repeat! Stock above strike? Decide to roll or let shares be called away.
At 50-80% profit, you can close early and write a new covered call.
Example Calculation
Setup
- Stock:AAPL @ €175
- Shares:100 shares
- Invested:€17,500
- Sold Call:€180 Strike, 45 DTE
- Premium Received:€2.50 × 100 = €250
Outcomes
- Break-even:€175 - €2.50 = €172.50
- Max Profit:€250 + €500 = €750 (4.3%)
- (Premium + Stock gain to strike)
- Annualized Return:~35% (if repeated)
- Downside Cushion:€2.50 (1.4%)
4 Possible Scenarios
What happens at expiration, depending on stock movement?
Scenario 1: Stock Stays Flat
Best outcome!Call expires worthless. Keep shares. Repeat.
Scenario 2: Stock Rises Slightly
Very good!Call expires worthless (below strike). Keep shares. Repeat.
Scenario 3: Stock Rises Sharply
Max profit reachedShares sold at €180. You miss €1,000 additional gain.
Scenario 4: Stock Falls
Loss, but cushionedCall expires worthless. Premium cushions loss. Write next call.
Choosing the Right Strike
| Delta | OTM % | Win Rate | Premium | Style |
|---|---|---|---|---|
| 0.30 (30 Delta) | ~5-7% | ~70% profit | Lower | Conservative |
| 0.40 (40 Delta) | ~3-4% | ~60% profit | Medium | Balanced |
| 0.50 (50 Delta - ATM) | 0% | ~50% profit | Highest | Aggressive |
0.30 (30 Delta)
Less premium, but higher probability of keeping shares. Ideal for long-term holders.
0.40 (40 Delta)
Good balance between premium and probability of profit.
0.50 (50 Delta - ATM)
Maximum premium, but high chance shares get called away.
Do's & Don'ts
Do's
- ✓Only write on stocks you want to own
- ✓Keep enough cash for transaction costs
- ✓Consider dividend dates
- ✓Avoid earnings or use them intentionally
- ✓Close position at 50-80% profit
- ✓Roll instead of assignment if you want to keep shares
Don'ts
- ✗Write covered calls on volatile meme stocks
- ✗Sell calls right before earnings (high risk)
- ✗Choose strike too close to current price
- ✗See assignment as a "loss" (it's your max profit!)
- ✗Forget that you must own the shares
- ✗Run into a crash without stop-loss
Frequently Asked Questions
How much can I make with covered calls?
Typical annualized returns are 8-15% on top of potential dividends and stock gains. For a €175 stock with €250 monthly premium: €3,000/year on €17,500 = 17% annualized. But: If the stock falls sharply, losses can exceed premiums.
What happens if my shares get "called away"?
Your shares get sold at the strike price. This is NOT bad - it's your maximum profit! You receive: Premium + stock gain up to strike. You can then buy new shares and write covered calls again. Or you can "roll" the position before expiration (buy back call, sell new one).
Can I write covered calls on ETFs?
Yes! SPY, QQQ, IWM and other major ETFs have very liquid options markets. ETFs are often better for beginners since they are less volatile than individual stocks and have no earnings risk. Premiums are lower, but so is risk.
What is "rolling" an option?
Rolling = Buying back the current option while selling a new one with later expiration (or different strike). Use this when: 1) You want to keep shares and call is ITM, 2) You want to take profit early and start a new trade. Rolling often costs a small net debit or generates a credit.
Should I write covered calls before dividends?
Caution! Just before ex-dividend, ITM calls have high early assignment risk. The call buyer might exercise to capture the dividend. Choose OTM strikes or avoid expiration dates right after the dividend.
Ready for Advanced Strategies?
Once you master covered calls, explore more income strategies.