Covered Call

The covered call strategy involves: 1) Own 100 shares of a stock (or buy them). 2) Sell one call option against those shares, typically with a strike price above the current stock price and an expiration 30-45 days out. 3) Collect the option premium. 4) If the stock stays below the strike at expiration, the option expires worthless and you keep the shares plus the premium. 5) If the stock rises above the strike, your shares are called away (sold) at the strike price, and you keep the premium plus any appreciation up to the strike.

Maximum profit = (Strike Price - Stock Purchase Price + Premium) × 100. Maximum loss = (Stock Purchase Price - Premium) × 100 (if stock goes to zero). The breakeven is the stock purchase price minus the premium received.

Many investors sell covered calls repeatedly (month after month) on their long-term stock holdings, generating steady income that can add 5-15% annually to their total return. This strategy works best on stocks with moderate volatility that trade in a range.

Covered calls are a practical strategy for income-oriented investors and retirees seeking to enhance the yield on their stock portfolios. In a low-interest-rate environment, the ability to generate 5-10% additional annual income from stock positions is particularly valuable.

The strategy also introduces investors to options in a low-risk way. Because the call is covered by owned shares, there is no risk of catastrophic loss from the options position itself. This makes it an excellent starting point for learning options trading before progressing to more complex strategies.