Covered Call

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: Covered Call is an options strategy in which an investor who owns at least 100 shares of a stock sells a call option on those shares, collecting premium income in exchange for agreeing to sell the shares at the strike price if assigned.

How a covered call works

The position has two parts: a long stock position and a short call option covering the same 100 shares. The investor receives the premium immediately. If the stock stays below the strike at expiration, the call expires worthless and the investor keeps both the premium and the shares. If the stock rises above the strike, the shares are likely to be called away at the strike price. Because the shares are already owned, the obligation is covered, which is why brokers usually allow this strategy at a basic option approval level.

Covered call example

Suppose you own 100 shares bought at $50. You sell one call with a $55 strike expiring in 45 days for $1.50, collecting $150.

  • Stock at $52 at expiration: the call expires worthless. You keep the shares and the $150, plus a $200 unrealized gain.
  • Stock at $60: your shares are sold at $55. Total profit is $500 on the stock plus $150 premium, or $650. You miss the extra $500 above $55.
  • Stock at $44: the call expires worthless. You lose $600 on the shares, offset by $150, for a net loss of $450.

Why investors use covered calls

Covered calls generate income from shares an investor already holds, similar to adding a yield on top of any dividend. They work best in flat or gently rising markets. Some investors also use the strike as a planned exit price, accepting assignment as a way to sell at a target.

Strike selection shapes the trade. A strike close to the current price pays a larger premium but makes assignment more likely and caps gains sooner. A strike further above the price pays less but leaves more room for the stock to rise. Shorter expirations decay faster but require more frequent management. Many investors choose strikes at prices where they would be content to sell, so being assigned feels like reaching a target rather than a loss of opportunity. Others roll the call forward to a later date or higher strike as expiration nears, collecting a new premium.

Covered call risks and trade-offs

  • Capped upside: gains above the strike go to the call buyer.
  • Full downside: the premium only slightly cushions a falling stock.
  • Early assignment: possible, especially before an ex-dividend date.
  • Taxes: assignment can trigger capital gains in a taxable account.

Covered call vs cash-secured put

Selling a cash-secured put option has a similar payoff shape: limited upside from the premium and downside exposure to the stock. The difference is the starting point. A covered call begins with shares; a cash-secured put begins with cash and may lead to buying shares. Higher implied volatility raises premiums for both, but also signals larger expected moves.

Frequently asked questions

Can you lose money on a covered call?

Yes. If the stock falls by more than the premium received, the position loses money. The premium only partly offsets declines in the shares.

What happens if a covered call is exercised?

Your 100 shares are sold at the strike price. You keep the premium and any gain up to the strike, but you no longer own the stock.

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For information only, not investment advice. See the disclaimer.