Educational content only — not investment advice. Options involve risk, including the possible loss of principal, and are not suitable for every investor. Nothing here is a recommendation to buy or sell any security.
A covered call is the simplest income trade in options: you own at least 100 shares of a stock, and you sell a call against them. You collect the premium up front. In exchange, you agree to sell your shares at the strike price if the stock runs past it. This account runs covered calls on its stock positions every week — it's the bread-and-butter strategy here.
Key terms
| Term | Plain-English meaning |
|---|---|
| Covered | You own the 100 shares, so if you're forced to sell them, you have them. No scrambling. |
| Cost basis | What you actually paid per share on average. Your personal break-even. |
| Assignment | When the call buyer uses their right and your shares get sold at the strike — usually automatically at expiration if the stock is above it. |
| Delta | Roughly, how much the option's price moves when the stock moves $1 — and, loosely, the market's guess at the chance the option finishes in the money. A 0.20 delta ≈ a ~20% chance. |
The one rule that matters: sell above your cost basis
The standing rule on this account: never sell a call below what you paid for the shares. Why? Because if the stock rallies and your shares get called away, you still walk away with a profit on the stock plus the premium. A covered call sold below your basis can turn a winning stock into a losing trade — the premium isn't worth that.
Worked example: the shape of a real trade
Here's the shape of a covered call this account runs on its HD position — 100 shares at a $297.03 cost basis:
- Sell one $300 call expiring in two weeks for $1.67 → collect $167 (1 × 100 × $1.67).
- The $300 strike sits above the $297.03 basis — the rule holds.
Two endings:
- HD stays under $300 through expiration. The call expires worthless. You keep the $167, keep your 100 shares, and can sell another call next cycle. This is the most common outcome — and the whole point.
- HD rallies past $300 and you're assigned. Your shares are sold at $300. Stock profit: ($300 − $297.03) × 100 = $297. Plus the $167 premium you already collected. Total gain: $464 on a two-week trade. You miss any rally beyond $300 — that's the price of the premium.
What you're really trading
A covered call swaps open-ended upside for immediate income. You keep:
- The premium, no matter what.
- All dividends while you hold the shares.
- Any stock gain up to the strike price.
You give up:
- Gains above the strike — if the stock moons, you watch from the sidelines holding your premium.
And note what it doesn't do: it doesn't protect you much on the way down. A $167 premium softens a $1,000 drop, but it doesn't prevent it. A covered call is an income trade on a stock you'd be happy holding — not a hedge.
Common mistakes
- Selling below your cost basis for a fatter premium. Lower strikes pay more, but assignment below your basis locks in a stock loss the premium rarely covers. The rule exists for a reason.
- Chasing the highest premium with no regard for delta. A call with a 0.50 delta pays beautifully — because there's roughly a coin-flip chance your shares get called away. Match the strike to an exit price you'd actually accept.
- Selling calls on stocks you don't want to sell. If you'd be upset to lose the shares at the strike, the strike is wrong — pick a higher one or skip the trade.
- Ignoring the ex-dividend date. A call buyer can exercise early to capture a dividend, taking your shares before expiration. Check the dividend calendar before selling calls on dividend payers.
- Paying to avoid assignment over and over. When a call goes deep in the money, you can roll it (buy it back, sell a later/higher one) — but doing that repeatedly at a debit can quietly turn a winner into a loser. Sometimes taking assignment at a profit above your basis is the right answer.
The takeaway
Own 100 shares. Sell a call above your cost basis at a strike you'd be happy to exit at. Keep the premium either way. The most common outcome — the stock stays put and the call withers — is also the best one for the income seller.
Check your understanding
Next: Lesson 7 — Earnings and IV crush → (or continue the path: Lesson 5, Cash-secured puts — coming soon)
Educational content only — not investment advice. Options involve risk, including the possible loss of principal. Do your own research before trading.