Covered Calls Strategy

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

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

How to Roll Covered Calls

Selling a covered call is about collecting “rent” on your shares. But sometimes you’ll want to roll (close your call and sell a new one) to keep collecting income or protect your shares.

When to Sell a Covered Call

When you own 100 shares and want steady income
When stock is flat or slowly rising
When you’re okay selling your shares at the strike price

Think of it like renting out your stock. If you’re happy with the rent and the price, sell the call.

When to Roll

If the stock moves close to or above your strike price
If you want more time to collect premiums
If you want to move to a higher strike to keep shares

Always roll for a net credit (extra premium). This lowers your cost basis and boosts returns.

Example: Rolling a Covered Call on AAPL

Step 1: Sell Initial Call

You own 100 AAPL at $170. You sell a $180 strike covered call for $4.00 ($400 premium).

Step 2: Stock Moves to $179

Your shares are near the strike. Instead of letting them get called away, you roll “out and up.”

Step 3: Roll the Call

Buy back the $180 call, then sell a new one at $185 with a later expiration. You collect an extra $1.50 ($150) net credit.

Result

You keep your shares, move the sale price higher, and still collect more premium. Your adjusted cost basis drops further thanks to the extra $150 credit from rolling up and out.

Key Takeaways

Sell covered calls when you want income from shares you own.
Roll if shares move near strike and you want to keep them longer.
Always look for a net credit when rolling — this is your extra income.
Rolling up = more upside, rolling out = more time, rolling up & out = both.

Covered calls are flexible: you can collect rent, move out the lease, or raise the rent as the stock grows.

Recap & Practical Checklist

Quick Recap

You own 100 shares → sell a call to collect rent (premium).
If stock stays below strike → keep premium + shares.
If stock goes above strike → sell shares at strike + keep premium.
Rolling = adjusting to keep shares or collect more income.

Covered Call Checklist

✅ Do I own at least 100 shares I’m okay selling?

✅ Is the strike price above my cost basis?

✅ Is expiration 30–45 days out for good premium?

✅ Am I happy with either outcome: keeping rent or selling shares?

Common Mistakes to Avoid

❌ Selling calls too close to your cost basis (risking loss).

❌ Forgetting ex-dividend dates (can trigger early assignment).

❌ Holding too long without rolling (miss out on extra credit).

Picking illiquid stocks with low option volume.

Next Steps

Start small: practice with 100 shares of a stock you trust.
Track premiums and adjusted cost basis in a simple spreadsheet.
Review trades monthly and note what worked best.
Explore advanced combos later (Wheel, CSP + CC).

Covered calls aren’t about guessing stock direction — they’re about turning your shares into consistent income. Stick to the checklist, avoid the common traps, and you’ll build steady returns.