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What a covered call actually is
A plain-English walkthrough of the first options strategy most people learn: what you agree to, what you get paid, and what you give up.
2 min read
A covered call is usually the first options trade people make, because it starts with something familiar: shares you already own.
The deal you are making
You own at least 100 shares of a stock. You sell someone a call option on those shares. That contract gives the buyer the right to buy your 100 shares at a set price (the strike) any time before a set date (the expiration).
In exchange, the buyer pays you cash up front. That payment is the premium, and it is yours to keep whatever happens next.
A made-up example
The numbers below are invented to keep the arithmetic easy.
- You own 100 shares of a stock trading at $50.
- You sell one call with a $55 strike that expires in a month.
- You collect $1.00 per share, so $100 in premium.
At expiration there are two outcomes:
| Stock at expiration | What happens | Your result on the trade |
|---|---|---|
| At or below $55 | The option expires worthless. You keep shares. | Keep the $100 premium |
| Above $55 | Your shares are sold ("called away") at $55. | $500 share gain + $100 premium = $600 |
What you give up
Upside above the strike. If the stock runs to $70, you still sell at $55. The premium is the price you were paid to accept that cap.
What you still carry
The downside. If the stock falls to $40, you still own shares that lost $1,000 in value. The $100 premium softens that; it does not remove it. A covered call is not a hedge.
Words you will see
- Assignment — being required to sell your shares because the buyer used the option.
- Out of the money — a call whose strike is above the current stock price.
- Rolling — closing the current option and opening a new one with a later date or different strike.
This is my own experience and opinion, shared for education. It is not financial, investment or tax advice, and I am not your advisor. Trading options involves substantial risk and you can lose more than you invest. Full disclaimer.