Your First Covered Call — Step by Step

What Is a Covered Call?

A covered call is an options strategy where you sell someone the right to buy your stock at a specific price (the strike price) by a specific date (the expiration). In exchange, you collect a payment called premium — and that money is yours to keep no matter what happens.

The strategy is called "covered" because you already own the shares. If the buyer exercises their right, you simply hand over the shares you already have. No need to buy anything on the open market.

How It Works

The mechanics are straightforward. You own 100 shares of a stock. You sell a call option at a strike price above the current market price. You collect the premium immediately. If the stock stays below the strike by expiration, the option expires worthless and you keep both the shares and the premium. If the stock rises above the strike, your shares get called away at the strike price — but you still keep the premium.

For example, imagine you own 100 shares of AAPL at $189. You sell a $205 call expiring in 30 days for $1.20 per share ($120 total). If AAPL stays below $205, you pocket the $120. If AAPL goes to $210, you sell your shares at $205 and still keep the $120 premium.

Real Example

Let's say AAPL is trading at $189.20 today. Here are realistic covered call options:

$205 strike, April 18 expiration: Premium of $1.20/share ($120 total). This is about 8.4% out of the money, giving your stock plenty of room to rise. The annualized return on the premium alone is roughly 9.2%. There's approximately an 85% chance you keep your shares.

The beauty is that $120 is yours regardless of what happens. It hits your account the moment you sell the call.

What Could Go Wrong?

Best case — stock stays flat or rises slightly: You keep your shares plus the premium. This is the most common outcome when you sell OTM calls.

Mixed outcome — stock rises above the strike: Your shares get sold at $205. You still profit from the stock appreciation plus the premium, but you miss out on gains above $205. Many investors are happy with this outcome since they were willing to sell at that price anyway.

Worst case — stock drops significantly: The premium cushions the fall slightly ($1.20 per share of protection), but if the stock drops substantially, you still lose on the share position. However, this downside exists whether you sell a covered call or not — the call premium actually makes it slightly better.

Key Terms

Strike Price — The price at which your shares could be sold ($205 in our example)

Expiration — The date by which the buyer must decide (April 18 in our example)

Premium — The payment you receive for selling the call ($120 in our example)

OTM (Out of the Money) — When the strike is above the current stock price. The stock would need to rise for the option to have intrinsic value.

Assignment — When the option buyer exercises their right and your shares are sold at the strike price.