If you own stocks and want to make extra money from them, covered calls might be for you. This strategy lets you earn income by selling call options on shares you already own.
What is a Covered Call?
A covered call is when you sell a call option on a stock you own. You collect money (the premium) upfront. In exchange, you agree to sell your shares at the strike price if the stock goes above it.
Simple version: You get paid now for agreeing to maybe sell your stock later at a higher price. If the stock stays flat or goes down a little, you keep the shares and the money. Win win.
How It Works
You own 100 shares of a stock (you need 100 shares per contract)
You sell a call option with a strike price above the current price
You collect the premium immediately
At expiration, one of two things happens:
Stock stays below strike: You keep your shares and the premium. You can sell another call.
Stock goes above strike: Your shares get sold at the strike price. You keep the premium plus the profit from selling higher.
Example
You own 100 shares of stock ABC at $50 per share ($5,000 total).
- Current price: $50
- You sell a $55 call expiring in 30 days for $1.00
- You collect $100 immediately (100 shares x $1.00)
Outcome 1: Stock stays at $50. The call expires worthless. You keep your shares and the $100. That is a 2% return in one month just from the premium.
Outcome 2: Stock goes to $60. Your shares get sold at $55. You made $5 per share ($500) plus the $100 premium. Total profit: $600. You miss out on the extra $5 move, but you still made good money.
Why Sell Covered Calls?
- Extra income: Make money from stocks that are just sitting there
- Lower your cost basis: The premium you collect reduces what you paid for the stock
- Works in flat markets: You can profit even when the stock goes nowhere
- Low risk: You already own the shares, so there is no margin requirement
The Downside
The main risk is missing out on big gains. If the stock shoots up way past your strike, you have to sell at the strike price. You still make money, but you leave profits on the table.
Also, covered calls do not protect you from big drops. If the stock crashes, you still lose money on your shares. The premium helps a little, but it will not save you from a big decline.
Best Stocks for Covered Calls
- Stocks you are okay selling if they go up
- Stocks with moderate volatility (higher premium but not too crazy)
- Stocks that pay dividends (extra income on top of the premium)
- Stocks you believe in long term but do not expect to moon soon
Tips for Selling Covered Calls
- Choose the right strike: Too close and you will get called away often. Too far and the premium is tiny. A good starting point is a strike 5% to 10% above the current price.
- Pick the right expiration: 30 to 45 days is often the sweet spot for time decay.
- Do not sell before earnings: Big moves can blow through your strike.
- Be consistent: Covered calls work best when you do them regularly, month after month.
Track Your Covered Calls
Pro Trader Dashboard tracks all your covered call trades automatically. See your premium collected, win rate, and total income generated.
Summary
Covered calls are a great way to make extra income from stocks you already own. You get paid upfront for agreeing to sell at a higher price. The strategy works best in flat or slowly rising markets. Just remember: if the stock takes off, you will miss some of the upside.
Want to learn more options strategies? Check out credit spreads or iron condors.