Covered Call: How the Options Income Strategy Works
Last updated 07/21/2026 by
Andrew Latham
Edited by
Andrew Latham
Summary:
A covered call is an options strategy where you sell a call option on a stock you already own to collect income from the option premium. It trades away some upside in exchange for cash today and a small cushion against losses.
- You own the shares: The call is “covered” because you hold the stock to deliver if the option is exercised.
- You collect a premium: The buyer pays you upfront for the right to buy your shares at a set price.
- Upside is capped: Your gains are limited to the strike price plus the premium.
- Best when neutral: It suits investors who expect a stock to stay flat or rise only modestly.
Owning a stock that is not moving much can feel like idle money. A covered call turns that holding into a source of income, as long as you are willing to sell the shares if the price climbs past a certain point.
What a covered call is
A covered call is a strategy where you sell one call option for every 100 shares of a stock you own. Selling the call generates immediate income called the premium.
The position is “covered” because you already hold the shares needed to fulfill the contract if the buyer exercises it. This is what separates it from a riskier naked call.
Selling the option is done through a sell to open order, which creates the obligation to deliver your shares at the agreed price.
How a covered call works
You choose a strike price and expiration date, then sell a call and collect the premium. According to the Options Industry Council, the strategy is also called a buy-write when you buy the stock and sell the call at the same time.
What happens next depends on where the stock trades at expiration.
- Stock stays below the strike: The option expires worthless, you keep the premium and your shares.
- Stock rises above the strike: Your shares are likely sold at the strike, and you keep the premium plus gains up to that price.
- Stock falls: You keep the premium, which partly offsets the loss on your shares.
The strike price you choose sets the ceiling on your gains and the point where your shares may be called away.
The tradeoffs of a covered call
A covered call gives you income now but caps your upside. If the stock soars, you miss the gains above your strike price.
You also keep the full downside risk of owning the stock, minus the premium you collected. The premium cushions a small drop but does not protect against a large one.
Your break-even point is the price you paid for the stock minus the option premium you received.
Pro Tip
Sell calls with a strike price above where you would be happy to sell the stock anyway. That way, if the shares get called away, you exit at a price you already found acceptable and keep the premium as a bonus.
Who uses covered calls
Covered calls suit investors who are neutral to mildly bullish on a stock they already own and want to generate income. They are common with long-term holdings and dividend stocks.
The strategy is less suitable when you expect a large price jump, since you would cap the gains you are hoping for. Setting one up follows a clear sequence.
How to set up a covered call
- Own at least 100 shares: Each call contract covers 100 shares of the underlying stock.
- Pick a strike price: Choose a price above the current market that you would accept as a sale price.
- Choose an expiration: Shorter expirations bring premiums in more often, longer ones pay more per contract.
- Sell to open the call: Place the order and collect the premium in your account.
- Manage at expiration: Let it expire, roll it to a new date, or allow the shares to be called away.
Because one contract equals 100 shares, the strategy works best once you hold stock in round lots of 100.
Related reading on options
- A call option gives its buyer the right to purchase shares at the strike price.
- The option premium is the income you collect for selling the call.
- An out of the money call has a strike above the current stock price, which is typical for covered calls.
Frequently asked questions
What is a covered call in simple terms?
A covered call is when you sell someone the right to buy a stock you own at a set price, in exchange for cash today. If the stock stays below that price, you keep the cash and the shares.
What is the maximum profit on a covered call?
Your maximum profit is the premium you collected plus any gain between your purchase price and the strike price. Gains above the strike go to the option buyer, not you.
What is the risk of a covered call?
The main risk is that the stock falls, since you still own it and only the premium offsets the loss. You also give up any upside above the strike price.
How many shares do you need for a covered call?
You need at least 100 shares of the stock, because each option contract covers 100 shares. Selling one call requires 100 shares to keep it fully covered.
Key takeaways
- A covered call means selling a call option on a stock you already own to collect premium income.
- It is “covered” because you hold the shares to deliver if the option is exercised.
- Your upside is capped at the strike price plus the premium collected.
- You keep the stock’s downside risk, softened only by the premium.
- Each contract covers 100 shares, so you need round lots to use it.
Covered calls are one of the more conservative ways to use options for income. You can compare brokerages that support options trading to find one with the tools and pricing you need.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.
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