A covered call is a popular options strategy used by investors to generate extra income from stocks they already own. It involves selling a call option against shares of a stock you hold—typically in blocks of 100 shares. In return, you collect a premium (cash) upfront, which can reduce your cost basis or provide steady cash flow, especially in sideways or slightly bullish markets.
This strategy works best when you believe the stock will stay flat or rise only slightly. If the stock stays below the strike price by expiration, you keep the premium and your shares. If it rises above the strike price, your shares may be “called away,” meaning you’ll have to sell them at the agreed-upon price—but you still keep the premium and any gains up to the strike.
Covered calls are ideal for long-term investors looking to boost returns on stocks they don’t plan to sell right away. It’s a simple, low-risk way to enhance portfolio income while maintaining a long position, making it a great starting point for those new to options.
Example
Suppose you own 100 shares of Apple (AAPL) at $200. You sell a 1-week $210 call option and collect a $2 premium per share ($200 total). If AAPL stays below $210, you keep both your shares and the premium. If it rises above $210, your shares are sold at $210, and you still keep the $200 premium—effectively selling AAPL for $212. You profit, but you give up any gains beyond $210.