Covered Calls Strategy

A covered call is a conservative options strategy that allows you to generate additional income from stocks you already own.

Strategy Overview

What You Need

  • 100 shares of stock per contract
  • Options-enabled trading account
  • Understanding of call options basics

Risk Level

Conservative

Lower risk than owning stocks outright due to premium income

Time Commitment

  • Initial setup: 30 minutes
  • Monitoring: 15 minutes/week
  • Trade management: Monthly

Essential Knowledge:

How Covered Calls Work

Think of covered calls like being a landlord. You own a property (your stock) and collect rent (option premium) from someone who might want to buy it later.

What You Need:

  • 100 shares of stock you own
  • Willingness to sell at a higher price
  • Options approval level 1 or higher

Real Example: Apple (AAPL) at $170

1. Own the Shares

You own 100 shares of AAPL at $170 ($17,000 total)

2. Sell the Call

Sell 1 call at $175 strike for $3.00 ($300 premium)

3. Possible Outcomes

  • Stock stays below $175: Keep shares and $300 premium
  • Stock above $175: Sell shares at $175 plus keep $300 premium

Step-by-Step Implementation

1. Stock Selection

Choose stocks that:

  • You're willing to hold long-term
  • Have good options liquidity
  • Pay dividends (optional but preferred)
Pro Tip: Use our scanner to find stocks with attractive covered call premiums

2. Strike Price Selection

Consider these factors:

  • 5-15% above current market price
  • Above your cost basis
  • At technical resistance levels
Example: If stock is at $50, consider $55 strike for 10% upside potential

3. Expiration Selection

Optimal timeframes:

  • 30-45 days for best premium decay
  • Monthly options for better liquidity
  • Consider ex-dividend dates

4. Position Management

Monitor and manage by:

  • Setting profit targets (50-75% of premium)
  • Rolling calls up and out if needed
  • Preparing for potential assignment

Real-World Example

Scenario: AAPL Trading at $170

Trade Setup:

  • Own 100 shares at $170 ($17,000 invested)
  • Sell 1 AAPL $180 Call (5.9% above market)
  • 45 days to expiration
  • Collect $4.50 premium ($450 total)

Possible Outcomes:

If AAPL Stays Below $180
  • Keep your shares
  • Keep $450 premium
  • 2.65% return (45 days)
  • Can sell another call next month
If AAPL Rises Above $180
  • Shares called away at $180
  • Keep $450 premium
  • Total profit: $1,450 ($1,000 stock gain + $450 premium)
  • 8.5% total return

Advanced Tips & Considerations

Strike Selection

  • Higher strikes = more upside potential
  • Lower strikes = more premium income
  • Consider your investment goals

Rolling Techniques

  • Roll up for more upside potential
  • Roll out for more premium
  • Roll up and out for both

Dividend Considerations

  • Watch ex-dividend dates
  • Adjust strikes accordingly
  • Consider early assignment risk

Tax Considerations

  • Premium is short-term capital gains
  • Stock gains depend on holding period
  • Consult tax professional
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