COVERED CALL WRITING
Overview
Own 100 shares of stock, then sell a call option against it for immediate premium income. You keep the premium whether the stock moves up, down, or sideways. If the stock is called away above your strike, you exit at a price you were comfortable selling anyway.
Setup
- 1.Own 100+ shares of a stock you're comfortable holding or selling at a target price.
- 2.Sell a call option with a strike 5-10% above the current price, expiring 30-45 days out.
- 3.Collect the premium upfront — it deposits into your account immediately.
- 4.At expiration: if stock is below strike, option expires worthless and you keep the premium. Repeat.
- 5.If stock rises above strike, shares are 'called away' — you sell at the strike price plus keep the premium.
Max profit
Premium collected + gain from current price to strike (if assigned). Capped at strike price.
Max loss
The stock can fall sharply — premium only partially offsets a significant decline. Downside is nearly the same as just owning the stock.
Breakeven
Purchase price of stock minus the premium collected (premium lowers your effective cost basis).
When to use
When you own stock and expect it to be flat or mildly bullish. Ideal for generating income on existing long-term holdings during low-volatility or sideways markets.
When to avoid
In strongly bullish markets where you'd regret capping gains. Don't sell calls below your cost basis — you'd lock in a loss on assignment.