Covered call

A covered call is an options strategy in which an investor who owns at least 100 shares of a stock sells one call option per 100 shares against that position. The investor collects the premium up front in exchange for agreeing to sell the shares at the strike price if the call is exercised.

How it works

The shares "cover" the obligation created by selling the call, so the seller does not face the unlimited risk of a naked call. The outcomes at expiration:

• Stock below the strike: the call expires worthless. The investor keeps the shares and the premium.
• Stock above the strike: the shares are typically called away at the strike. The investor keeps the premium plus any gain up to the strike, but misses everything above it.
• Stock falls: the premium offsets part of the loss, but the downside of owning the stock remains.

Sellers benefit from theta, since the call loses time value every day the stock stays put.

Why it matters for traders

Covered calls turn some of a stock's upside into current income, which is why they are popular with long-term holders and the basis of many income ETFs. The trade-off matters most around catalysts: selling calls before an earnings report or FDA decision collects rich premium but caps the gain if the news is good.

Assignment can come early. A short in-the-money call is most likely to be exercised the day before an ex-dividend date if the dividend exceeds the call's remaining time value.

Example

An investor owns 100 shares of Contoso Robotics (CTSO), bought at $40, and sells one $45 call expiring in 30 days for $1.00, collecting $100.

FAQ

Can you lose money on a covered call?

Yes. If the stock falls by more than the premium collected, the position loses money, just as owning the shares alone would.

What happens if my covered call is assigned?

Your 100 shares are sold at the strike price, and you keep the premium. You can buy back the shares or sell another option if you want to keep the strategy going.