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Covered Call

In short

Selling a call on a stock you own — generates income, caps upside

You own 100 shares of Apple and sell someone the right to buy them at $200. They pay you $5 per share ($500). If Apple stays below $200, you keep the $500. If it rises above $200, you sell your shares at that price.

Covered calls are a conservative options strategy — selling calls against owned stock to generate premium income. The downside: if the stock rockets past the strike, you miss out on those gains. Best in neutral to slightly bullish markets.

Formula

P&L = Stock Return + Premium Collected - max(0, Stock Price - Strike)

Related concepts

  • Call Option — A call option is like a coupon that lets you buy a stock at today's price even in the future. If the stock rises, you profit. If it falls, you only lose what you paid for the coupon (the premium).
  • Protective Put — Like buying insurance on your car. You own 100 Apple shares and buy a put at $150. If Apple crashes to $100, your put lets you sell at $150. You paid a premium for this safety net.
  • Theta — Options are like ice cubes that melt over time. Theta measures how fast value evaporates daily. An option with theta of -$0.05 loses $5 per day per contract, all else equal. Time is your enemy as an option buyer.
  • Strike Price — The strike price is the agreed price in the option contract. For a call, you can buy the stock at the strike. For a put, you can sell at the strike. Choose your strike based on how big a move you expect.