# Covered Call > A covered call sells a call against shares you own to collect premium. Learn the payoff, how to pick strikes, the trade offs and when the strategy works best. Source: https://learn.tradelabsai.com/options/covered-call/ Track: Options · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Covered Call", https://learn.tradelabsai.com/options/covered-call/ A covered call combines owning shares with selling a call option on those shares. You collect the call premium as income. In exchange, you agree to sell your shares at the strike price if the call is exercised, which caps your upside. Covered calls are among the most widely used option strategies, popular with long term investors who want extra income from holdings they expect to rise slowly or move sideways. ## How it works 1. **Own 100 shares** (one contract's worth) of a stock or ETF. 2. **Sell one call,** usually out of the money, expiring in 30 to 45 days. 3. **Collect the premium.** 4. **At expiry:** if the stock is below the strike, the call expires and you keep shares and premium. If above, your shares are sold at the strike (you can also buy the call back or roll it before then). ## Payoff at a glance | Feature | Covered call | |---|---| | Outlook | Neutral to mildly bullish | | Maximum gain | (Strike minus stock cost) + premium | | Maximum loss | Stock cost minus premium (if the stock falls to zero) | | Break even | Stock cost minus premium | | Time decay | Helps | *Figure: Covered call at expiration: stock downside, capped upside.* ## Worked example **Example: A covered call on a $48 stock** You own 100 shares bought at $48. You sell a 35 day $52 call for $1.10, collecting $110. - **Stock at $50 at expiry:** call expires. Your shares gained $200, plus $110 premium: $310. - **Stock at $56:** shares are called away at $52. Gain: $400 on the shares plus $110 = $510. Holding the stock alone would have made $800. - **Stock at $45:** call expires. Shares lost $300, offset by $110: net loss $190. - **Break even:** $48 minus $1.10 = $46.90. The premium of $1.10 on a $48 stock is about 2.3% for 35 days. ## The trade off Covered calls turn uncertain future upside into certain income today. They: - **Add return** in flat or slowly rising markets. - **Cushion small declines** by the amount of the premium. - **Give up large gains** above the strike. - **Do not protect** against big declines, beyond the premium. Research on the Cboe S&P 500 BuyWrite Index (BXM), which tracks a monthly at the money covered call on the S&P 500, has found returns broadly similar to the index over long periods with lower volatility, though it lagged in strong bull markets. See [Theta Harvesting](https://learn.tradelabsai.com/options/theta-harvesting/). ## Choosing a strike | Strike | Premium | Upside room | Chance of assignment | |---|---|---|---| | In the money | Highest | None | High | | At the money | High | None | About half | | Slightly out of the money | Moderate | Some | Lower | | Far out of the money | Low | Plenty | Low | Many traders pick a strike around 0.20 to 0.35 delta, or a price they would be happy to sell at. See [Delta](https://learn.tradelabsai.com/options/delta/). ## Choosing an expiration Shorter expirations (2 to 6 weeks) decay faster and allow more frequent adjustment; longer ones collect more premium in total but tie you to the strike longer. See [Option Expiration Dates](https://learn.tradelabsai.com/options/option-expiration-dates/). ## Assignment and dividends If the call is in the money near an ex dividend date, it may be assigned early and you lose the dividend. Check dates before selling. See [Exercise and Assignment](https://learn.tradelabsai.com/options/exercise-and-assignment/) and [Early Exercise](https://learn.tradelabsai.com/options/early-exercise/). ## Managing a covered call - **Let it expire** if it is out of the money near expiry. - **Buy back** the call after most of the premium has decayed, then sell another. - **Roll up and out** if the stock rises and you want to keep the shares. - **Accept assignment** if you are happy to sell at the strike. ## Taxes In many countries, assignment is a sale that can trigger capital gains tax, and some covered call rules can affect holding periods. Check local rules. See [Trading Taxes and Capital Gains](https://learn.tradelabsai.com/industry/trading-taxes-and-capital-gains/). ## Common mistakes - **Selling calls on stocks you expect to soar.** - **Selling calls below your purchase price,** locking in a loss if assigned. - **Chasing high premiums** on very volatile stocks, which often carry high downside risk. - **Forgetting it is still a long stock position.** ## Frequently asked questions ### What is a covered call? Owning shares and selling a call option on them to collect premium, agreeing to sell the shares at the strike if assigned. ### Is a covered call risky? The main risk is the stock falling, as with owning shares. The premium cushions small declines, and upside is capped at the strike. ### What happens if my covered call is assigned? Your shares are sold at the strike price. You keep the premium and any gain up to the strike. Next, learn the put equivalent in [Cash-Secured Put](https://learn.tradelabsai.com/options/cash-secured-put/). ## Sources - Cboe, [BuyWrite indices](https://www.cboe.com/us/indices/benchmark_indices/) ## Continue learning - Next lesson: [Cash-Secured Put](https://learn.tradelabsai.com/options/cash-secured-put/) - Previous lesson: [Short Put](https://learn.tradelabsai.com/options/short-put/) - Related: [Short Put](https://learn.tradelabsai.com/options/short-put/): A short put sells a put option to collect premium, profiting if the price stays above the strike. Learn the payoff, risks, margin and how it can buy stock. - Related: [Short Call](https://learn.tradelabsai.com/options/short-call/): A short call sells a call option to collect premium, profiting if the price stays below the strike. Learn the payoff, uncapped risk, margin and safer alternatives. - Related: [Cash-Secured Put](https://learn.tradelabsai.com/options/cash-secured-put/): A cash secured put sells a put while holding cash to buy the shares if assigned. Learn the payoff, the wheel strategy, strike choice and the risks involved. - Related: [Collars](https://learn.tradelabsai.com/options/collars/): A collar holds shares, buys a protective put and sells a call to fund it. Learn the payoff, zero cost collars, strike choices and who uses this hedge. - Related: [Exercise and Assignment](https://learn.tradelabsai.com/options/exercise-and-assignment/): Exercise is when an option holder uses their right; assignment is when a seller must fulfil it. Learn the process, automatic exercise and how to manage it. - Related: [Theta Harvesting](https://learn.tradelabsai.com/options/theta-harvesting/): Theta harvesting sells options to collect time decay and the volatility risk premium. Learn the evidence, the common structures and how to survive the tail risk.