Covered Calls: The Options Strategy That Generates Income from Stocks You Own

A covered call is an options strategy where an investor who owns shares simultaneously sells (writes) call options on those same shares. The premium collected provides immediate income and a small downside buffer. ## How It Works Owning 100 shares of stock at $50, you sell a call option with a $55 strike for $2 premium. Three outcomes: - **Stock stays below $55**: Option expires worthless, you keep the $2 premium (4% return on the position) - **Stock rises above $55**: Shares get "called away" at $55 — you profit $5/share + $2 premium but miss gains above $55 - **Stock drops**: You still own shares at a loss, partially offset by the $2 premium ## Use Cases Covered calls are considered conservative — regulators classify them as lower-risk than naked options, and they're permitted in retirement accounts. They're commonly used to generate yield on flat or slowly rising holdings and form the second leg of the "wheel strategy" (sell cash-secured puts to acquire stock, then sell covered calls against assigned shares). The tradeoff is clear: you exchange unlimited upside for certain income. In a strong bull market, covered call sellers systematically underperform buy-and-hold. **See also:** Stock Options Explained: Puts, Calls, and How They Work · AI-Assisted Stock Trading Bots: Alpaca API, Congressional Copy Trading, and the Wheel Strategy