The one-sentence version
A covered call is an agreement to sell 100 shares you already own at a set price by a set date — and you get paid cash today for making that promise.
The mechanics
You own at least 100 shares of a stock. You sell (or "write") one call option against them, choosing a strike price (the price you'd sell at) and an expiration date. A buyer pays you a premium — real cash, deposited immediately, yours to keep no matter what happens next.
Three things can happen at expiration:
- The stock stays below the strike — the option expires worthless, you keep your shares AND the premium, and you can do it again.
- The stock closes above the strike — your shares get "called away" at the strike price. You keep the premium plus any gain up to the strike, but you give up gains beyond it.
- The stock falls — you still keep the premium, which cushions the loss, but the premium is small protection against a big decline.
The trade-off in plain English
Covered calls convert uncertain future upside into certain present income. That's the whole deal. If the stock rockets past your strike, you'll watch gains you "owned" go to someone else — sellers call this the tuition of the strategy. If the stock drifts sideways or climbs slowly, covered calls can meaningfully boost returns on shares that would otherwise just sit there.
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What the numbers look like
Say you own 100 shares at $50 and sell a 30-day call at the $53 strike for $0.75 per share ($75 total). Expires worthless: you earned $75 on $5,000 of stock — 1.5% in a month, roughly 18% annualized if you could repeat it. Called away: you sell at $53, keeping the $3 gain plus the premium — $375 total, 7.5% in a month. Stock drops to $46: you're down $400 on shares but the $75 premium trims the loss. Run your own scenario in our Options Income Calculator and see the payoff shape in the Options P/L Calculator.
Choosing strikes and dates
Most income-focused sellers work in the 30–45 day window, where time decay is meaningful but there's still real premium to collect, and choose strikes above their cost basis — often around a 0.20–0.30 delta, which roughly maps to a 70–80% chance of expiring worthless. Selling below your cost basis risks locking in a loss if assigned: the cardinal sin of covered-call writing.
When covered calls hurt
In roaring bull markets, capped upside stings. On stocks you'd hate to lose, don't sell calls at strikes you don't mean. And premium never fully protects a crash — a covered call is not a hedge, it's an income overlay.
FAQ
Do I need 100 shares?
Yes — one contract covers exactly 100 shares.
Can I buy the call back early?
Yes; many sellers close at 50–60% of max profit and redeploy rather than waiting out the last slow days of decay.
What about taxes?
Premiums are generally taxable when the position closes, and assignment affects your share holding period — specifics vary, talk to a tax professional.
What's the "wheel"?
A system that pairs covered calls with cash-secured puts — read our complete wheel-strategy guide.
Related tools
Premium, ROC, and annualized return on any covered call or CSP.
Interactive payoff diagrams for every basic strategy.
Turn your own assumptions into a full-year income projection.
A risk-% rule turned into an exact share count.
More like this in our Options hub, or jump straight to Cash-Secured Puts: Get Paid While You Wait to Buy and How to Read an Options Chain.
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