Beginner · Learn

What is a covered call?

The other core strategy Collect52 covers — earning income on stock you already own.

The basic idea

A covered call is when you own at least 100 shares of a stock and sell someone else the right to buy those shares from you at a set price (the "strike") by a certain date. In exchange, you collect a premium upfront — it's "covered" because you already own the shares you might have to sell, unlike a naked call.

A concrete example

You own 100 shares of a stock trading at $100. You sell a call with a $105 strike expiring in 30 days, collecting $150 in premium. If the stock stays below $105, the call expires worthless — you keep the $150 and your shares. If the stock rises above $105, your shares get "called away" — sold at $105 — but you still keep the $150 premium on top of the $5/share gain up to the strike.

Why people do this

It's a way to generate extra income on stock you're already holding — useful if you don't expect major near-term upside, or if you'd be comfortable selling at a modest gain anyway.

The real risk

The main trade-off is capping your upside — if the stock rallies well past your strike, you miss out on gains above that level, since your shares get sold at the strike price regardless of how high the stock actually goes.

This is educational information only — see our disclaimer.