Covered calls are a strategy where you sell a call option on a stock you already own. This generates income through premium payments while still holding onto your shares—unless the stock price exceeds the strike price, in which case, you sell your shares at that price.
Here’s how to make covered calls work for you: (1) Own the Stock – You must own the shares before selling a call. Typically you have to own at least 100 shares. (2) Choose a Strike Price – Pick a price you're willing to sell your shares for if the option is exercised. (3) Sell the Call – Sell the call option and collect the premium income. (4) Monitor Your Position – If the stock price rises above the strike price, your shares may be sold. If not, keep both your shares and the premium.
Pros – Extra income through premiums. Limited downside protection.
Cons – Capped upside potential if the stock rises above the strike price.
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