📉 Options & Cboe · Lesson 4 of 7 · 9 min
Covered Calls — Getting Paid to Wait
💰 You own 100 shares of Apple. Someone will pay you $300 today for the right to buy them from you at a price you'd have been happy to sell at anyway. You can take that deal every month. That's a covered call — the closest thing to collecting rent on stocks, and the one options trade your grandmother's financial advisor is allowed to like.
💡 Key idea
Covered calls: own shares + sell calls = collect premium. Capped upside, consistent income.
🧠 Why it matters
Covered call = you OWN 100 shares + SELL a call against them. Collect premium immediately. If stock rises above strike, shares get 'called away' at strike (you sell, keep premium). If it stays below, you keep shares AND the premium. Repeat monthly for consistent income. The catch: you still own the shares, so if the stock drops, that loss is yours — the premium only softens it by $3/share.
🌍 In the real world
💵 You own 100 Apple shares at $180. You sell a $190 call for $3/share ($300 premium). Apple stays at $182 — you keep the $300 (1.7% return in 30 days, ~20% annualized if repeated monthly). If Apple hits $200, you sell at $190 but still keep the $300 premium.
📌 Takeaways
- 'Covered' = your shares cover the delivery obligation
- Caps upside above the strike price
- Systematic monthly income strategy for long-term holders
✅ Test yourself
Why is it called a 'covered' call?
- It covers your losses
- Your shares cover the obligation — you can deliver them if assigned
- It has a broker guarantee
- It covers you from all losses
Answer: B · Your shares cover the obligation — you can deliver them if assigned
If the buyer exercises the call, you must sell 100 shares. Your existing shares 'cover' that obligation — you're not buying them at market price to deliver.
What's the main trade-off of selling covered calls?
- No income generated
- Unlimited downside risk
- Capped upside — you miss gains above the strike price
- You lose your shares immediately
Answer: C · Capped upside — you miss gains above the strike price
If the stock rockets above your strike, you sell at the lower strike and miss the extra gains. The premium you collected is your payment for that cap.
When is selling covered calls most attractive?
- When you expect the stock to crash immediately
- When you'd happily sell at the strike and want income while waiting
- When you don't own the underlying stock
- Only in bear markets
Answer: B · When you'd happily sell at the strike and want income while waiting
Covered calls work best when you'd be happy selling at the strike anyway — you're essentially getting paid to place a limit sell order.
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