The Covered Call
Earn income on stock you already own — the gateway strategy for option sellers.
A covered callSelling a call on stock you own to earn income. is the gentlest way to start selling optionsThe right, not the obligation, to buy or sell at a set price.: you own the underlying stock, and you sell a callThe right, not the obligation, to buy or sell at a set price. against it, collecting premium. It’s the gateway strategy that turns time decayHow much an option loses in value each day from time passing. from your enemy into your income.
- Setup — own (typically) one lot of stock, sell one callThe right, not the obligation, to buy or sell at a set price. against it (usually slightly OTMWhere an option’s strike sits relative to the current price.).
- You earn — the premium, as income, regardless of what the stock does (it lowers your effective cost basis).
- You give up — gains above the strikeThe fixed price at which an option can be exercised. (sharesA unit of ownership in a company. called away); you keep all downside riskVolatility of only the negative returns. of holding the stock (cushioned only by the premium).
What’s the downside of a covered call?
Two things: your upside is capped above the strike (you miss big rallies), and you still bear the stock’s *downside* — the premium only cushions a small drop, not a crash. It’s a strategy for sideways-to-mildly-bullish views on stock you’re comfortable owning and selling, not a free lunch.