Why Covered Calls Matter
If you already own stocks, there’s a simple way to make extra money from them — even if the price doesn’t move much.
It’s called a covered call, and it’s one of the most popular options trading strategies among long-term investors.
In plain English: a covered call lets you collect income (a premium) by agreeing to sell your shares at a certain price in the future.
It’s like renting out your stocks for extra cash.
Step 1: What Is a Covered Call?
A covered call is when you:
- Own shares of a stock (that’s the “covered” part).
- Sell a call option on that stock to another investor.
By selling the option, you agree to sell your shares at a specific price (called the strike price) if the stock rises above that level before the option expires.
In exchange, you receive a premium — instant income paid to you upfront.
If the stock stays below the strike price, you keep your shares and the premium.
Step 2: A Simple Example
Let’s say you own 100 shares of Apple (AAPL) trading at $180 per share.
You sell a 1-month call option with a $190 strike price for $2 per share ($200 total).
Now two things can happen:
- Scenario 1: Apple stays below $190.
- The option expires worthless.
- You keep your shares and the $200 premium.
- Scenario 2: Apple rises above $190.
- The buyer exercises the option.
- You sell your 100 shares at $190 each.
- You still keep the $200 premium — plus the $10 per share gain.
Either way, you win something.
Step 3: Why It’s Called “Covered”
The strategy is “covered” because you already own the shares you’re agreeing to sell.
This protects you from the unlimited losses that can occur in other options strategies.
It’s considered a low-risk, income-generating approach compared to most options trades.
Step 4: When to Use a Covered Call
Covered calls work best when:
- You own stocks you believe will stay flat or rise slightly.
- You want to earn extra income while holding.
- You’re okay with selling your shares if they rise past the strike price.
This is common for investors holding blue-chip stocks like Apple, Microsoft, or ETFs like SPY.
Step 5: Pros and Cons of Covered Calls
✅ Pros
- Earn extra income from stocks you already own.
- Provide limited downside cushion (the premium offsets small price drops).
- Easy to manage and repeat monthly for consistent cash flow.
❌ Cons
- You cap your upside — if the stock skyrockets, you’ll have to sell at the strike price.
- Requires owning at least 100 shares per contract (can be costly for expensive stocks).
- Doesn’t protect against big losses if the stock drops significantly.
Step 6: Picking the Right Strike Price and Expiration
Choosing the right strike price is key:
- Higher strike = less premium, but more chance to keep shares.
- Lower strike = more premium, but higher chance of being called away.
For expirations, many investors sell monthly options to generate steady income and regularly reassess their positions.
Example: Selling a 30-day call 5–10% above the current price is a common approach.
Step 7: Covered Calls in Retirement Accounts
Good news — you can use covered calls in many IRAs and retirement accounts.
Since they’re considered conservative and fully backed by owned shares, most brokers allow them.
They’re great for investors looking to:
- Boost portfolio income
- Reinvest premiums
- Reduce risk from short-term price dips
Step 8: Tax Considerations
Covered call premiums are taxed as short-term capital gains, even if you hold the stock long-term.
If your shares are sold due to the option being exercised, that sale triggers capital gains tax based on your cost basis.
So it’s smart to track each trade carefully for tax reporting.
Bonus Tip: Use ETFs for Simpler Income
Don’t want to manage calls manually?
You can invest in covered call ETFs like:
- XYLD (S&P 500 Covered Call ETF)
- QYLD (Nasdaq 100 Covered Call ETF)
- JEPI (JPMorgan Equity Premium Income Fund)
These automatically run covered call strategies and pay monthly dividends — perfect for passive investors.
Final Thoughts
Covered calls are one of the easiest ways to turn your stock portfolio into an income machine.
They won’t make you rich overnight, but they’ll help your investments work harder every month.
If you’re looking for steady cash flow and lower risk — while still owning the stocks you believe in — covered calls are worth learning and trying in moderation.