Learn trading ideas & strategies from TradeKing's experts

Upcoming Live Events
More live events...
Learn it. Trade it.

Open your TradeKing account today!

Upcoming Live Events
More live events...

Covered Call

AKA Buy-Write

NOTE: This graph indicates profit and loss at expiration, respective to the stock value when you sold the call.

The Setup

  • You own the stock
  • Sell a call, strike price A
  • Generally, the stock price will be below strike A

Who Should Run It

Rookies and higher

NOTE: Covered calls can be executed by investors at any level. See the Rookie’s Corner for a more in-depth explanation of this strategy.

When to Run It

You’re neutral to bullish, and you’re willing to sell stock if it reaches a specific price.

The Sweet Spot

The sweet spot for this strategy depends on your objective. If you are selling covered calls to earn income on your stock, then you want the stock to remain as close to the strike price as possible without going above it.

If you want to sell the stock while making additional profit by selling the calls, then you want the stock to rise above the strike price and stay there at expiration. That way, the calls will be assigned.

However, you probably don’t want the stock to shoot too high, or you might be a bit disappointed that you parted with it. But don’t fret if that happens. You still made out all right on the stock. Do yourself a favor and stop getting quotes on it.



About the Security

Options are contracts which control underlying assets, oftentimes stock. It is possible to buy (own or long) or sell (“write” or short) an option to initiate a position. Options are traded through a broker, like TradeKing, who charges a commission when buying or selling option contracts.

Options: The Basics is a great place to start when learning about options. Before trading options carefully consider your objectives, the risks, transaction costs and fees.

The Strategy

Selling the call obligates you to sell stock you already own at strike price A if the option is assigned.

Some investors will run this strategy after they’ve already seen nice gains on the stock. Often, they will sell out-of-the-money calls, so if the stock price goes up, they’re willing to part with the stock and take the profit.

Covered calls can also be used to achieve income on the stock above and beyond any dividends. The goal in that case is for the options to expire worthless.

If you buy the stock and sell the calls all at the same time, it’s called a ”Buy / Write.” Some investors use a Buy / Write as a way to lower the cost basis of a stock they’ve just purchased.

Maximum Potential Profit

When the call is first sold, potential profit is limited to the strike price minus the current stock price plus the premium received for selling the call.

Maximum Potential Loss

You receive a premium for selling the option, but most downside risk comes from owning the stock, which may potentially lose its value. However, selling the option does create an “opportunity risk.” That is, if the stock price skyrockets, the calls might be assigned and you’ll miss out on those gains.

Break-even at Expiration

Current stock price minus the premium received for selling the call.

TradeKing Margin Requirements

Because you own the stock, no additional margin is required.

As Time Goes By

For this strategy, time decay is your friend. You want the price of the option you sold to approach zero. That means if you choose to close your position prior to expiration, it will be less expensive to buy it back.

Implied Volatility

After the strategy is established, you want implied volatility to decrease. That will decrease the price of the option you sold, so if you choose to close your position prior to expiration it will be less expensive to do so.

Options Guy's Tips

  • As a general rule of thumb, you may wish to consider running this strategy approximately 30-45 days from expiration to take advantage of accelerating time decay as expiration approaches. Of course, this depends on the underlying stock and market conditions such as implied volatility.
  • You may wish to consider selling the call with a premium that represents at least 2% of the current stock price (premium ÷ stock price). But ultimately, it’s up to you what premium will make running this strategy worth your while.
  • Beware of receiving too much time value. If the premium seems abnormally high, there’s usually a reason for it. Check for news in the marketplace that may affect the price of the stock. Remember, if something seems too good to be true, it usually is.


Tools

195 Options Pricing Calc Image small
Options Pricing Calculator Research an option contract's Greeks and implied volatility. Forecast theoretical values and compare them to current bid/ask prices. And change variables to reflect your market forecast — all in an...

1297 Trader Network Forums
Trader Network Forums Speak your mind about the securities you’re trading – and connect with other traders in our Network.

620 Profit + Loss Calc Image small
Profit + Loss Calculator Get a thorough and visual understanding of your option trade’s profit and loss potential - before you place it.

More tools...

Related Strategies

522 Long Common Stock on Margin
Long Common Stock on Margin This strategy is similar to long common stock, but on steroids. That’s because when buying stock on margin you normally put up only half of the money to purchase the...

405 Christmas tree bfly w/Puts image
Christmas Tree Butterfly with Puts You can think of this strategy as simultaneously buying one long put spread with strikes D and B and selling two bear put spreads with strikes B and A. Because the long...

219 Fig Leaf Image
Fig Leaf This strategy acts like a covered call but uses a LEAPS call as a surrogate for owning the stock. Though the two plays are similar, managing options with two different...

More strategies...