CFDs are complex financial instruments and carry a high level of risk due to leverage. A significant proportion of retail investors incur losses when trading leveraged products such as CFDs. You should carefully consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your capital.
A covered call is an options strategy that combines two positions: owning shares of an asset and selling a call option on those same shares. The goal is to generate additional income through the premium collected from the sale of the contract. It is one of the most commonly used tactics by investors who expect price stability or moderate increases.
The investor already owns the shares. By selling a short call on them, they collect an immediate premium. If the price remains below the strike price at expiration, they keep both the shares and the premium. If the price exceeds the strike price, they must sell the shares at the agreed-upon price, but the premium collected offsets part of the lost profit.
Covered calls work best in specific scenarios. It is not a strategy for every market condition.
If you expect the price to move little or rise slightly, the premium collected adds returns to a position that would otherwise be stagnant.
Some investors use this tactic monthly, selling short-term stock contracts on stocks they plan to hold for the long term. The recurring income serves as an additional source of revenue for the portfolio.
The execution follows a clear sequence.
Own at least 100 shares of the underlying stock. Each options contract covers 100 shares.
Sell a call option. Choose a strike price above the current price and a near-term expiration (30–45 days is typical).
Collect the premium. The income is credited to your account immediately.
Wait until expiration. If the price does not reach the strike price, you keep the shares and the premium. If it exceeds the strike price, you sell the shares at the strike price.
The position in the shares “covers” the obligation to sell. That is why it is called a covered call: you are not selling an option short.
An investor holds 100 shares of a company at $50 per share. They sell a contract with a strike price of $55 and a 30-day expiration. They collect a premium of $1.50 per share: $150.
If the stock closes at $53 at expiration, they keep the shares and the $150. If it rises to $60, they sell at $55 (as required by the contract). They earn $500 from the price increase plus the $150 premium, but you lose the additional $500 between $55 and $60. Your total profit: $650 instead of $1,000 without the strategy.
This tactic seems conservative, but it has pitfalls that beginners overlook.
Selling a stock option you plan to sell soon.
Choosing strike prices too close to the current price.
Not having a plan if the stock drops sharply.
The biggest limitation is that it doesn’t protect against declines. If the stock drops 20%, the $1.50 premium doesn’t offset that loss.
This tactic addresses the specific needs of the long-term investor.
Generate income from stocks you already own.
Reduce the position’s cost basis with accumulated premiums.
Productively take advantage of periods of low volatility.
It is an income strategy, not a hedging strategy. It complements the portfolio but does not replace risk management.
A covered call combines stocks in your portfolio with the sale of a call option to generate additional income. It works best in sideways or slightly bullish markets and limits potential gains in exchange for an immediate premium.