Covered call strategy

The covered call is the most widely used options strategy for stock investors. It's the foundation of income investing with options , a way to generate consistent cash flow from shares you already own by selling others the right to buy them at a higher price.

The basic concept

You own 100 shares of a stock. You sell a call option against those shares, collecting premium upfront. In exchange, you agree to sell your shares at the strike price if the stock rises above it by expiration.

The word "covered" means your shares cover the obligation , you're not selling a call you can't fulfill. This makes it a defined-risk strategy.

How it works , step by step

Step 1: You own 100 shares of AAPL, currently trading at $185.

Step 2: You sell the $195 call expiring in 30 days for $2.50 per share. You receive $250 immediately.

Step 3: One of two things happens:

If AAPL stays below $195 at expiration: The call expires worthless. You keep the $250 premium. You still own your shares. Repeat next month.

If AAPL rises above $195 at expiration: The call is exercised. You sell your 100 shares at $195, regardless of where the stock is trading. You keep the $250 premium. Your total proceeds: $195 + $2.50 = $197.50 per share.

The tradeoffs

What you gain:

• $250 in immediate cash income
• A lower effective cost basis on your shares ($185 − $2.50 = $182.50)
• A slightly better exit price than the strike if called away ($197.50 effective sell price)

What you give up:

• Any gains above $195. If AAPL rallies to $220, you're still selling at $195. You've capped your upside.

This is the fundamental covered call tradeoff: you collect income in exchange for capping your upside.

Who should use covered calls

Income investors: If you own stocks for the long term and they're sitting flat or moving slowly, covered calls generate income during periods of low volatility or range-bound trading.

Patient sellers: If you're willing to sell a stock at a specific price (say, 5–10% above current market), the covered call helps you get paid to wait for that price.

Cost basis reducers: By collecting premium month after month on the same position, you progressively reduce your effective purchase price , improving the breakeven on a position even if the stock doesn't move.

Choosing the right strike and expiration

Strike: Most covered call traders target OTM strikes 3–8% above the current stock price. This provides some room for the stock to appreciate while still collecting meaningful premium. The delta of the short call is typically 0.20–0.35.

Expiration: Monthly (30–45 DTE) is the most common approach. You collect premium, wait for expiration, and repeat. Weekly covered calls collect less premium per cycle but can be more responsive to short-term market changes.

IV rank: Higher IV rank = more premium collected for the same strike. When IV rank is elevated, covered calls are more attractive. When IV rank is very low, the premium may be so small it barely justifies the upside cap.

The covered call and the wheel

The covered call is the second half of the wheel strategy:

1. Sell a cash-secured put → if assigned, you own the stock
2. Sell a covered call → if the stock is called away, you're back to cash
3. Repeat from step 1

This systematic approach generates income on both legs of the cycle.

Related terms: Call option, strike price, assignment, premium, the wheel, cash-secured put, IV rank

Try it on Stryke: Find covered call opportunities filtered by IV rank in the Options Screener.

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