Trading fundamentals · options basics, the first options strategy most stock investors learn
Covered Calls
Own 100 shares, sell someone the right to buy them from you at a higher price, and get paid for it today. The premium is yours to keep, whatever happens next.
The trade-off: your upside stops at that price, and the stock can still fall.
$1.50premium per share
$34strike, on a $32 stock
2months to expiration
What a covered call is
There are three ways to end up selling a call option. Only one of them is a covered call: you own the stock first, then sell the call against it. The shares are what "cover" the promise you just sold.
not thisBuy a call, then sell it
You bought a call earlier and you're closing it out. That's just exiting a long option.
not thisSell a call you don't cover
Selling a call without owning the shares is shorting it. If the stock rips, you have to buy shares at any price to deliver them.
this pageOwn the stock, sell the call
You already hold 100 shares per contract. If the call gets used, you hand over shares you already own.
The deal
1
You're the seller this time
When you buy a call, you pay for the right to buy a stock at a set price (the strike) before a set date (the expiration).
With a covered call you're on the other side. Someone pays you for that right on shares you already own.
The example from the video: INTC at $32, the $34 call about two months out selling for $1.50 a share. One contract covers 100 shares, so that's $150.
These were INTC's prices when the video was recorded. Today's prices will be different; the mechanics won't.
2
The good and the bad, in one line each
The good: you get paid. Weekly, monthly or a few months out, you choose the expiration, and the money is yours the moment the call sells.
The bad: you've capped your upside. If the stock runs far past the strike, the buyer gets that run, not you.
What the call does not do: protect your shares. If the stock falls more than the premium, you still lose money.
The video calls the premium guaranteed money. It's fair to say you can't lose on the sale of the call itself, but the position as a whole can lose, because you still own the stock.
The INTC covered call
One contract, the video's numbers.
Buy 100 shares at $32−$3,200
Sell 1 × $34 call, about 2 months out, at $1.50+$150 today
Most you can make (sold at $34, plus the premium)+$350
Break-even ($32 − $1.50)$30.50
Premium, whatever the stock doesyours to keep
Three words you'll see
That's most of the vocabulary.
premiumThe price of the option
$1.50 a share here. As the seller, you collect it.
strikeThe agreed sale price
$34 here. If the stock ends above it, your shares go at $34.
expirationWhen the deal ends
About two months here. After that, the promise is gone.
assignedYour shares get called away
The buyer used the call, and your shares were sold at the strike.
Four outcomes, worked out
Same trade every time: 100 shares at $32, the $34 call sold for $1.50. Only the stock's price two months later changes.
Four ways it can end
The four scenarios, per share
Two-month return is the total divided by the $32 paid. "If repeated" multiplies by six, the way the video annualizes it; it assumes you could do the same trade six times in a row, which nobody can promise.
INTC at expiration
Call
Stock
Premium
Covered call
2-month return
If repeated
Stock alone
Falls to $30
expires worthless
−$2.00
+$1.50
−$0.50
−1.6%
—
−$2.00
Stays at $32
expires worthless
$0.00
+$1.50
+$1.50
4.7%
about 28% a year
$0.00
Rises to $33
expires worthless
+$1.00
+$1.50
+$2.50
7.8%
about 47% a year
+$1.00
Shoots to $40
used: sold at $34
+$2.00
+$1.50
+$3.50
10.9%
about 66% a year
+$8.00
Drops to $25
expires worthless
−$7.00
+$1.50
−$5.50
−17.2%
—
−$7.00
The last row isn't in the video. It's there because a bigger drop is the outcome the premium can't fix.
3
Down, flat or a little up: the premium helps
Falls to $30: the call expires worthless. You're down $2 on the shares and up $1.50 from the call, so −$0.50 instead of −$2.
Stays at $32: the stock did nothing and you still made $1.50, about 4.7% in two months.
Rises to $33: still under the strike. $1 on the shares plus $1.50 is $2.50, about 7.8%.
In all three, the buyer won't pay $34 for shares they can buy cheaper on the open market, so you keep your stock and the premium.
4
Way up: the cap
INTC shoots to $40. The buyer uses the call, buys your shares at $34 and can sell them at $40.
You made $2 on the stock plus $1.50 on the call: $3.50, about 10.9% in two months.
Holding the stock alone would have made $8. That gap is the cost of the covered call.
The video's honest question: would you be upset? You made money, just less than you could have. Whether that stings depends on why you sold the call.
Where you'd be wrong on the stock, decided before you enter.
Variable 1 · Duration
How far out the expiration is. More time on the contract means more premium, but not more per month.
One long call or three short ones
7
More time, more premium
The $34 call two months out sold for $1.50. Six months out, the same strike sold for $2.61.
Three two-month calls at $1.50 would add up to $4.50, so the short ones look better.
That only works if the $34 call is still worth about $1.50 each time you go to sell the next one.
Per month, the shorter call paid more: $0.75 against about $0.44. The longer call pays less per month for knowing the number today.
8
Option prices don't sit still
If INTC falls from $32 to $28, the video estimates the next two-month $34 call sells for around $0.50, maybe less.
Short calls: you may get a better price or a worse one each time. Long call: you know what you'll collect.
Either way, a stock that fell $4 cost you $4 on the shares. The premium question sits on top of that.
Neither choice is right in general. It's certainty now against flexibility later.
Same $34 strike, two clocks
The video's INTC prices.
2 months out$1.50 · $0.75 a month
6 months out$2.61 · about $0.44 a month
Three 2-month calls, if prices hold$4.50
Three 2-month calls, if INTC drops to $28about $2.50
The 6-month call either way$2.61, known today
Variable 2 · Strike price
Where your upside gets capped. A strike close to the price pays more; a strike further away leaves more room to run.
$34 or $38
9
Closer strike, more premium
The $34 call paid $1.50. The $38 call, same expiration, paid $0.50.
If INTC does nothing, the $34 strike wins: $1.50 kept against $0.50.
If INTC runs to $38, the $38 strike wins: +$6.50 against +$3.50, because you're forced to sell at $38 instead of $34.
The two lines cross at $35. Below it the closer strike is ahead; above it the further strike is.
10
What makes premium bigger
More time on the contract.
A strike closer to the current price.
A more volatile stock. If it can swing hard either way, the seller deserves more for locking in a price.
A fat premium usually means one of these is working against you: a long lock-up, an early cap, or a stock that moves a lot.
The dilemma, in numbers
Per share, INTC bought at $32.
$34 strike: premium / most you can make$1.50 / +$3.50
$38 strike: premium / most you can make$0.50 / +$6.50
INTC flat at $32$34 wins, +$1.50 vs +$0.50
INTC at $38$38 wins, +$6.50 vs +$3.50
Premium goes up with
From the video's pricing tips.
timeFurther expiration
More time for the stock to get past the strike.
distanceStrike near the price
Easier for the stock to reach.
volatilityA jumpier stock
More pay for locking yourself in.
How to place it
Own the shares, then one order: sell to open. Brokers handle the rest automatically at expiration.
Five contracts, $750
11
Stock first, and a stock you'd keep
Options come in 100-share blocks: one contract per 100 shares you own.
Already own the shares? Place one order: sell to open, the number of contracts, the expiration, the strike and your price.
You don't have to cover everything. With 500 shares you can sell 1, 3 or 5 contracts.
Many brokers let you buy the shares and sell the call in a single order.
Don't buy a weak stock just to sell calls on it. Collecting $1.50 while the shares lose $5 is dropping quarters to pick up pennies.
12
After you sell
The premium shows up in your account as soon as the order fills.
Above the strike at expiration: your shares are sold at the strike automatically.
Below the strike: the call expires worthless and drops off. You keep the shares and can sell another one.
Calls on US stocks can be used before expiration too, most often just before a dividend. If you'd rather keep the shares, you can buy the call back before then.
Your broker will need to approve you for options before you can sell one. Covered calls are usually in the first approval level.
The 5-contract math
500 shares of INTC, the $34 call at $1.50.
Premium per share$1.50
× 100 shares per contract$150 a contract
× 5 contracts$750
Credited when the order fills+$750
Shop for the deal
Some weeks there's nothing worth selling.
worth itA fair price for the cap
On a stock you'd hold anyway, at a strike you'd be fine selling at.
skip itThe cap costs more than it pays
If the reward isn't worth giving up the upside, don't sell the call.
Before you sell one
Four questions. If any answer is no, the premium isn't worth it.
You keep the premium. You give up the big run. You still own the risk.
A covered call turns some of a stock's possible upside into cash today. That can be a good trade on a stock you'd hold anyway, at a strike you'd be glad to sell at.
It is not protection: if the stock falls more than the premium, you lose money, just a little less than you would have.
Own 100 shares for every contract you sell.
Max profit = strike − your price + premium.
Break-even = your price − premium.
More time, a closer strike or a jumpier stock means more premium, and a bigger trade-off.
If the deal isn't worth it, don't sell the call.
Built from a beginner options video on covered calls. The INTC prices ($32 stock, $34 and $38 strikes, $1.50, $2.61 and $0.50 premiums) are the video's, from when it was recorded, not current quotes; price paths in the charts are made up. Returns ignore commissions, dividends and taxes. Options carry risk and need broker approval; this is education, not advice and not a promise of income. Watch the reference video →