Covered call

Selling a call against 100 shares you already own to collect premium — income in exchange for capping your upside.

A covered call is when you own at least 100 shares of a stock and sell a call option against them. You collect the premium up front, and in exchange you agree to hand over your shares at the strike price if the buyer exercises. Traders use it to squeeze extra income out of stock they already hold, especially when they think the price will drift sideways or rise only modestly.

Say you own 100 shares of a stock trading at 50 and you sell one call with a 55 strike for 1.20. You keep the 120 in premium no matter what. If the stock stays below 55 at expiration, the option expires worthless and you can sell another call next month. If it climbs above 55, your shares get called away at 55 and you still pocket the premium plus the gain up to the strike.

The common mistake is treating it as free money. Your upside is capped at the strike, so a big rally leaves you watching from the sidelines, and the premium only cushions a small drop, not a real decline. Only write covered calls on shares you are genuinely willing to sell at that strike.

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Educational use only. Quotes are delayed ~15 minutes and nothing here is financial advice. Options trading involves substantial risk of loss.