Learn · Options, from scratch
Covered calls
Selling someone the right to buy shares you already own. Income in exchange for giving away your upside.
You own 100 shares. You sell someone a call on them, collecting a premium. If the share stays below the strike, the option expires and you keep both the shares and the premium. If it rises above, your shares are sold at the strike.
It is called covered because you already hold what you have promised to deliver. That single fact removes the unlimited loss that makes naked call writing dangerous.
What you are actually trading
Interpretation
You are selling your upside for cash today
The premium is certain and immediate. What you give up is every penny of gain above the strike price, in every scenario where the share rises sharply. You have converted an uncertain large gain into a certain small one.
The premium is certain and immediate. What you give up is every penny of gain above the strike price, in every scenario where the share rises sharply. You have converted an uncertain large gain into a certain small one.
The three outcomes
| Share at expiry | What happens | Your result |
|---|---|---|
| $90 | Option expires worthless | Keep shares (now worth $90) and $3 |
| $105 | Option expires worthless | Keep shares (now worth $105) and $3 |
| $110 | At the strike | Keep shares (now worth $110) and $3 — the best case |
| $140 | Shares called away at $110 | $10 gain plus $3 — and you miss $30 |
Illustrative only. Dealing costs and tax are ignored throughout.
Why it is popular
Because most of the time nothing happens and you keep the premium. Repeated across many months it feels like an income stream from shares you were holding anyway.
The honest objections
- It caps the outcome that pays for everything. Long-run equity returns are driven by a minority of very large gains. Systematically selling those away changes the shape of your results.
- It does not protect you on the way down. A $3 premium is thin comfort if the share falls $30. You still own all of that.
- Selling means a decision. If the shares are called away you must decide whether to buy back in, possibly higher.
Fact
The premium is not free money
It is payment for a real obligation, priced by a market. Receiving it means somebody assessed the risk you took on and thought that was a fair price for it.
It is payment for a real obligation, priced by a market. Receiving it means somebody assessed the risk you took on and thought that was a fair price for it.
Covered calls are often described as conservative. They are certainly safer than naked calls. Being safer than the most dangerous option position available is a low bar to clear.
Education, not advice. These lessons explain how things work. They do not tell you what
to buy, and Wealth Signal does not publish recommendations. Full disclaimer.