65-Day Academy · Day 54 · Options: Strategies
The Covered Call — Renting Out Upside
The construction
Own 100 shares + sell one call against them (strike above current price). You collect the premium immediately; in exchange you agree to SELL your shares at the strike if assigned. The stock you already own "covers" the obligation — no naked risk. It is the most conservative option strategy and the foundation of the Wheel.
The trade-off, stated honestly
The premium is INCOME FOR UPSIDE: you keep the stock's gains up to the strike, keep the premium, and cap your upside at strike + premium. If the stock doubles, you participate only to the strike. Covered calls are a yield strategy in FLAT-TO-SLOW markets and an opportunity-cost machine in booms. The premium does not make the position "safe" — you still hold 100 shares of full downside (minus the small premium buffer).
Selection rules
Strike: 5–10% OTM for a balance of yield vs upside retention (deeper ITM = more income, more assignment risk; far OTM = negligible income). Expiration: 30–45 days (the theta sweet spot — decay is fastest there without weekly noise). Underlying: something you WANT to own at the strike anyway — because assignment IS the sale. Never sell calls on a stock you are unwilling to part with.
What you'll practise
Own 100 shares at $92 cost. Stock now $100. Sell one $105 call, 35 days out, for $2.50. What is the max profit if assigned, and the breakeven?
15 XP in the app · intermediate
Sources
- Covered CallCBOE education
- Covered Callstastytrade
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All lessons are for educational purposes only and are not individualized financial advice, a recommendation, or a solicitation to buy or sell any security. Options involve substantial risk and are not suitable for every investor.