What Is a Covered Call?
A covered call is when you own 100 shares of stock and sell a call option against it, collecting premium income. You're essentially renting out your shares for cash—every single month.
If the stock stays flat or goes up modestly, you keep the premium + any stock gains. If it stays below your strike price, you pocket the premium. If it rockets past your strike, you sell at the strike (still a profit, just capped).
It's the closest thing to "free money" in trading—when done right.
Simple Covered Call Example
You own: 100 shares of Apple @ $180
You sell: 1x $185 call, 30 days out, for $2.50/share
Premium collected: $250
Scenarios at expiration:
- AAPL < $185: Keep shares + $250 premium. Repeat next month.
- AAPL = $185: Keep shares + $250 premium. Repeat.
- AAPL > $185: Shares called away at $185. Profit = ($5 stock gain × 100) + $250 = $750.
Income: $250/month on $18,000 capital = 1.4% monthly = 16.8% annually (just from premiums).
Why Covered Calls Work
Three forces make covered calls profitable:
- Theta decay: Options lose value every day. You sold the option—so theta works for you.
- Volatility premium: Market always overprices options (insurance premium). You collect the excess.
- Flat markets: Most stocks chop sideways 60-70% of the time. Covered calls turn dead money into income.
Best Stocks for Covered Calls
Not every stock works. You need specific traits:
- Moderate volatility: IV rank 30-60%. Too low = tiny premiums. Too high = risk of assignment.
- Liquid options: Tight bid-ask spreads. Large caps only.
- Dividend payers (bonus): Collect dividends + option premium.
- Strong fundamentals: You're holding long-term. Don't sell calls on garbage.
Favorites: AAPL, MSFT, NVDA, JPM, XOM, SPY, QQQ
Strike Selection: The Art of Balance
Strike Selection Framework
Aggressive (5-10% OTM):
Higher premium, higher risk of assignment. Use if bullish short-term.
Example: Stock at $100, sell $105 call.
Moderate (10-15% OTM):
Balanced approach. Best for most traders. Good premium, low assignment risk.
Example: Stock at $100, sell $112 call.
Conservative (15-20% OTM):
Low premium, very low assignment risk. Use if you want to hold forever.
Example: Stock at $100, sell $120 call.
Monthly Routine: The Covered Call Cycle
The 30-Day Loop
Day 1: Own 100 shares. Sell 30-45 day call at 10-15% OTM.
Days 2-25: Monitor position. Theta decay working for you.
Day 26-30: Option near expiration. Three scenarios:
- Stock below strike: Option expires worthless. Sell new call.
- Stock at strike: Roll up and out (sell next month's call at higher strike for more premium).
- Stock above strike: Let shares get called away (profit). Repeat on new stock or buy back shares and start again.
Target: 1-2% monthly income. 12-24% annually just from premiums.
Real Example: SPY Covered Calls
Case Study: 6-Month Income Stream
January: Buy 100 SPY @ $450. Sell $465 call (30 days, $2.50 premium).
Result: SPY closes at $458. Option expires worthless. Keep $250.
February: Sell $470 call ($2.30 premium).
Result: SPY closes at $462. Keep $230.
March: Sell $468 call ($2.40 premium).
Result: SPY closes at $471. Shares called away at $468. Total gain = $18 stock + $240 premium.
Total 3-month income: $720 premium + $1,800 stock gain = $2,520 on $45,000 (5.6% in 3 months).
Rebuy SPY, repeat cycle.
Advanced Technique: The Wheel Strategy
The Wheel combines covered calls with cash-secured puts for continuous income:
The Wheel (Full Cycle)
- Sell cash-secured put at strike you'd like to own stock (collect premium)
- Get assigned → Now own 100 shares below market price
- Sell covered call above your cost basis (collect premium)
- Get called away → Stock sold for profit + premium kept
- Repeat step 1
This is how professionals generate 2-4% monthly income consistently.
When Covered Calls Fail
Covered calls have one major risk: opportunity cost.
- Stock rockets up: You're capped at strike price. Miss the 30% rally.
- Stock crashes: Premium doesn't protect you from major decline. You still own the stock.
- Trending markets: In strong bull markets, covered calls underperform buy-and-hold.
Solution: Only sell covered calls on stocks you're okay selling at the strike price. Or use wider strikes (15-20% OTM) to reduce opportunity cost.
Final Thoughts: The Income Blueprint
Covered calls won't make you rich overnight. But they'll turn a flat portfolio into a cash-flow machine. 1-2% monthly income, compounded, changes everything.
$100k portfolio generating 1.5% monthly = $1,500/month = $18k/year. Reinvest that, and you're compounding at 20%+ annually.
It's not sexy. But it's consistent. And in trading, consistency beats brilliance every time.