How to Sell Call Options: Covered Calls and Naked Calls Explained

Selling call options is a popular strategy for generating income from your stock holdings or capitalizing on neutral to bearish market views. When you sell a call, you collect premium upfront and take on an obligation that comes with both opportunities and risks. This guide covers everything you need to know about selling calls, from covered calls to naked calls.

What Does Selling a Call Option Mean?

When you sell (or "write") a call option, you are giving someone else the right to buy 100 shares of a stock from you at a specific price (strike price) before a certain date (expiration). In exchange, you receive a premium payment immediately. Your goal is for the stock to stay below the strike price so the option expires worthless and you keep the premium.

Two Ways to Sell Calls

There are two main approaches to selling call options, with very different risk profiles:

1. Covered Calls (Lower Risk)

A covered call means you already own the underlying stock. This is the safer approach because if the stock rises above your strike, you simply sell your shares at the strike price.

• Requires owning 100 shares per contract sold
• Risk is limited to stock declining in value
• Popular income strategy for long-term investors
• Approved for most brokerage accounts

2. Naked Calls (Higher Risk)

A naked call means selling calls without owning the underlying stock. This is an advanced strategy with significant risk.

• Unlimited loss potential if stock rises sharply
• Requires margin account with high approval level
• Large margin requirements
• Only for experienced traders

Why Traders Sell Call Options

Selling calls offers several benefits:

• Income generation: Collect premium regardless of market direction
• Reduced cost basis: Premiums lower your effective purchase price
• Time decay advantage: Theta works in your favor as the seller
• High probability of profit: You can profit even if the stock does not move
• Downside protection: Premium provides a small buffer against losses

Choosing Strike Prices and Expirations

Strike Price Selection

Your strike price choice affects your risk and reward:

• At-the-money (ATM): Higher premium but greater chance of assignment
• Out-of-the-money (OTM): Lower premium but stock has room to rise
• Deep OTM: Very low premium but highest probability of keeping shares

Expiration Date Selection

• Weekly options: Quick premium but requires frequent management
• 30-45 days out: Sweet spot for premium decay
• Longer expirations: More premium but capital tied up longer

Understanding Assignment Risk

When you sell a call, you may be assigned, meaning you must deliver shares at the strike price:

• Early assignment: Can happen anytime, more likely near ex-dividend dates
• Assignment at expiration: Automatic if option is in-the-money
• Covered calls: You simply sell your existing shares
• Naked calls: You must buy shares at market price to deliver (potentially huge loss)

Calculating Profit and Loss

For covered calls, here are your potential outcomes:

• Maximum profit: (Strike price - Stock purchase price + Premium received) x 100
• Breakeven: Stock purchase price - Premium received
• Maximum loss: Stock going to zero minus premium received (for covered calls)

Managing Your Covered Call Positions

Active management can improve your results:

• Roll up: If stock rises significantly, buy back your call and sell a higher strike
• Roll out: If expiration approaches, close and open a new position further out
• Roll down: If stock drops, close and sell a lower strike for more premium
• Close early: Buy back calls for a profit when they have lost most of their value

Risks of Selling Calls

Understand these risks before selling calls:

• Capped upside: You miss gains if the stock rises above your strike
• Stock decline: Premium only provides limited protection against losses
• Assignment timing: Early assignment can disrupt your plans
• Opportunity cost: Capital tied up in the covered position
• Naked call risk: Unlimited loss potential (avoid unless expert)

Best Practices for Selling Calls

• Only sell covered calls: Naked calls are too risky for most traders
• Choose stocks you want to own: Be comfortable if assigned or if stock drops
• Avoid earnings dates: Volatility can cause unexpected moves
• Sell 30-45 DTE: Optimal time decay period
• Target 0.20-0.30 delta: Good balance of premium and safety
• Close at 50% profit: Take gains and redeploy capital

Tax Considerations

Selling options has tax implications:

• Premium received is typically short-term capital gains
• Assignment may affect holding period of underlying shares
• Consult a tax professional for your specific situation

Summary

Selling call options, particularly covered calls, is an excellent strategy for generating income from your stock holdings. By understanding strike selection, expiration timing, and proper position management, you can add consistent premium income to your portfolio. Remember to focus on covered calls, choose stocks you want to own, and always have a management plan in place.

Learn more about options income strategies in our covered call guide or explore selling put options for another income strategy.