Covered Call Strategy Explained

The covered call strategy is one of the most popular income-generating options strategies. It involves holding a stock and selling a call option against it. This generates premium income and offers downside buffer - ideal for flat or mildly bullish markets.

• Stock: Microsoft (MSFT)
• Stock Price: $330
• Sell 1 Call Option: Strike $340, Premium $4.00
• Premium Collected: $400
• Income: $400

Outcome:

• If MSFT stays below $340 by expiration, you keep the full $400 premium and shares.
• If MSFT stays above $340 by expiration, Shares sold at $340 ($10 capital gain) + $400 premium.
• Pair this with Cash-Secured Puts to form the Wheel Strategy for recurring income.

How It Works:

• Own at least 100 shares of a stock.
• Sell 1 call option contract for every 100 shares.
• Collect the premium upfront.
• If the stock stays below the strike, you keep the stock and the premium.
• If the stock rises above the strike, your shares may be sold ("called away") - but you still keep the premium.