A covered call turns shares you already hold into a source of income. You sell someone the right to buy your stock at a set price, and you keep the premium they pay — whatever happens next.
How it works
You own at least 100 shares of a stock. You sell one call option against them at a strike price above today's price. The buyer pays you a premium immediately. The "covered" part means that if you're assigned, you already own the shares to deliver — no scramble required.
The trade-off
| You gain | You give up |
|---|---|
| Premium income today, kept no matter what. | Upside above the strike — gains beyond it go to the buyer. |
| A small cushion against a price dip. | Flexibility — your shares may be called away. |
Example: you own 100 shares at $50 and sell a $55 call for $2. If the stock stays below $55 you keep your shares and the $200. If it rises to $60, your shares are sold at $55 — you still profit, but you miss the move from $55 to $60.
The risks to weigh
A covered call does not protect you much if the stock falls hard — the premium only softens the first small drop. And in a strong rally you'll regret capping your upside. It works best on stocks you're happy to hold and would be content to sell at the strike, in calm or gently rising markets.
The takeaway
Covered calls trade some of your potential upside for steady income. Used on the right stock, with a strike you'd genuinely accept, they're a sensible way to make a long-term holding work a little harder.
