Covered calls

The steps below are the order the trade is actually placed in, and the order matters: what has to be in the account before an option can be sold is what makes the obligation coverable. None of the steps mentions a price, because there is no options-chain feed behind this site — nothing on this page is a quote, and no premium named anywhere here is one that exists in the market today.

1. Hold at least 100 shares of the underlying stock or ETF. One option contract covers 100 shares, so the position is sized in round lots.
2. Sell (write) one call contract per 100 shares, choosing two things: the strike price you are willing to sell at, and the expiration date.
3. The premium is credited on the trade date and settles the next business day. It is yours whatever the stock does afterwards.
4. If the stock is below the strike at expiration the call expires worthless. You keep the shares, keep the premium, and can write another call.
5. If the stock is above the strike the shares are called away at the strike. The position becomes cash, and any move above the strike belonged to the buyer.
6. Before expiration you can buy the call back to close it — at whatever it then costs, which in a rally is more than you received.

Every line below is a rule of how the contract works, not a forecast and not a price. None of it moves when the market moves.

What pays you

The call premium paid by the option buyer. Dividends on the shares keep being paid to you for as long as you still hold them, so a covered call sits on top of an existing dividend, it does not replace it.

Best case

The premium received, plus the difference between the strike and your cost basis if the shares are called away. Everything above the strike belongs to the option buyer.

Worst case

The full cost of the shares less the premium received. A covered call does not protect the downside — it cushions it by exactly the premium and no more.

Breakeven

Share cost basis minus the premium received per share.

Capital required

100 shares per contract, in a cash, margin or retirement account with basic option approval. No extra margin is posted, because the shares themselves are the collateral.

Broker approval

Usually the lowest option approval level a broker offers.

Assignment

US single-stock and ETF options are American-style: the buyer may exercise at any time up to expiration. Early exercise clusters the day before an ex-dividend date, when the dividend is worth more to the buyer than the call's remaining time value. If you are assigned then, you deliver the shares at the strike and forfeit that dividend.

Why tax gets its own box here rather than a line at the end. Premium is not taxed the way a dividend is, the treatment can change depending on whether the contract expires, is bought back or is assigned, and being assigned turns an option trade into a share sale or a share purchase with its own consequences. The note below is the general US structure, not advice, and not a substitute for asking someone about your own return.

This is the half of the trade that arrives later. The premium is collected once, at the start, and it is the whole of what this position can pay. The obligation behind it runs for the entire life of the contract, and the list below is what that obligation costs when the market moves through it rather than around it.

Full explainer in the Learn library: Covered calls. Run your own numbers with the covered-call yield calculator.