WTF is a Covered Call?

The surprisingly simple strategy that Wall Street doesn’t want you to understand

---

We’re passionate about options… more specifically we’re passionate about covered calls as a way to generate regular income. You see, we view stocks as an investment. We buy stocks that we think are a good value or that we think are good companies that will continue to grow and be successful. We all agree that we don’t buy stocks as a mechanism to generate quick returns… because you can’t time the market, right? … RIGHT?

But then there’s the rub. You buy stocks to hold and grow your investment over time… but what if you want to go out for a steak dinner. You aren’t going to sell a share of Amazon for a $100 gain (that you’ll have to pay taxes on at the end of the year) and then miss that next leg up that Amazon takes next week. No- that just doesn’t make much sense. But… you could sell an out of the money covered call on 100 shares of Amazon and get your 100 bucks for dinner and then if Amazon takes that big leg up before expiration -well - you just roll out and up. Boom - have another steak dinner and avoid the exercise of the option. Isn’t that beautiful?

And this is what nobody tells you; covered calls are not some exotic financial instrument dreamed up by Wall Street wizards in their $5,000 suits. They’re actually the most boring, straightforward way to generate monthly income from stocks you already own. The only reason they seem complicated is because the financial services industry has the same relationship with simplicity that vampires have with garlic.

Think about it: if regular people understood how easy it is to collect monthly rent on their stock positions, who would pay 1.5% annually to have some fund manager do it for them? Nobody, that’s who. So instead, we get buried under an avalanche of Greek letters, complex formulas, and warnings about “sophisticated strategies” that sound like they require a PhD in rocket science.

Spoiler alert: they don’t.

In fact, if you can understand the concept of renting out your spare bedroom on Airbnb, you already understand covered calls. Wall Street just wrapped it in more jargon than a Pentagon briefing to keep you confused and paying fees. Let’s fix that right now.

Table of Contents

• The Ridiculously Simple Truth About Covered Calls
• Why This Actually Works (The Stats Wall Street Bros Don’t Want You to Know)
• The “Rent vs. Own” Analogy That Makes Everything Clear
• What Makes This “Covered” (And Safe)
• The Current Market Reality (Why This Strategy is Hot Right Now)
• The Three Types of Covered Call Outcomes (All Good for You)
• Common Myths Debunked (What Your Broker Won’t Tell You)
• The Spreadsheet Hell Problem (And Why Your Sanity Matters)
• The “But What If…” Questions (Real Talk About Risks)
• Ready to Stop Leaving Money on the Table?

The Ridiculously Simple Truth About Covered Calls

A covered call is two things happening at once:

1. You own 100 shares of stock (this is the “covered” part - you actually own what you’re selling)
2. You sell someone the right to buy those shares from you at a specific price by a specific date

That’s it. No complex math, no mysterious formulas, no need to understand what the hell “delta” means.

Here’s a real-world example using Apple (AAPL), because everyone knows Apple:

Let’s say you own 100 shares of Apple stock that you bought at $180 per share. Apple is currently trading at $185. You think it’s a good company, but you don’t expect it to shoot up dramatically in the next month.

So, you sell someone a “call option” that gives them the right to buy your 100 Apple shares for $195 (that’s your chosen “strike price”) any time in the next 30 days. For this privilege, they pay you $3.50 per share upfront.

Your immediate benefit: You just collected $350 cash ($3.50 × 100 shares) deposited into your account today.

What happens next: One of two things, both good for you:

Scenario 1: Apple stays below $195 by expiration day

• The option expires worthless (nobody wants to pay $195 for stock worth less than $195)
• You keep your $350 rent money
• You still own your Apple stock
• You can sell another covered call next month and collect more rent

Scenario 2: Apple goes above $195 by expiration day

• Your stock gets “called away” (sold) for $195 per share
• You receive $19,500 for your shares ($195 × 100)
• You keep the original $350 rent money
• Total cash in your account: $19,850

Do the math: You bought at $180, sold at $195, plus collected $350 in “rent.” That’s a profit of $1,850 (10.3%).

Why This Actually Works (The Stats Wall Street Bros Don’t Want You to Know)

Here’s the dirty little secret that makes covered calls such a ridiculously effective strategy:

Over 75% of all options expire worthless.

Let that marinate for a minute. Three-quarters of the time, when someone pays you upfront for the right to buy your stock, they never actually buy it. They just… forget about it, apparently. Or get distracted by the next shiny investment object that catches their eye.

This isn’t some obscure statistic buried in an academic paper nobody reads. It’s the fundamental reality of options markets, and it exists because most option buyers are either:

• Day traders convinced they’ve found the next GameStop
• Hedge funds doing complex things you don’t need to understand (or want to)
• People who watched one too many YouTube videos about “turning $1,000 into $100,000”

What they’re definitely not is calm, rational investors who actually want to own your stock for the long haul. Which is why most options expire like forgotten gym memberships - unused and profitable for the people collecting the fees.

The “Rent vs. Own” Analogy That Makes Everything Clear

Still confused? Let’s use the real estate analogy that makes this crystal clear:

Your Stock = Your House

• You own it outright
• It has value that goes up and down
• You can sell it whenever you want

Selling a Covered Call = Renting Out a Room

• Someone pays you monthly rent ($350 in our Apple example)
• They get certain rights (to buy your house at a set price)
• But you still own the property and collect the rent

The Option Buyer = Your Tenant

• They pay you rent upfront for one month
• They have the right (but not obligation) to buy your house at the agreed price
• If they don’t buy, you keep the rent and can rent again next month
• If they do buy, you get paid the full agreed price plus all the rent you collected

The beauty of this arrangement? Unlike real estate, where bad tenants can damage your property, option buyers can’t hurt your stock. The worst case scenario is they buy it from you at a price you already agreed was acceptable.

What Makes This “Covered” (And Safe)

The word “covered” isn’t just financial jargon - it’s actually a safety feature.

When you sell a covered call, you’re “covered” because you own the actual stock. If someone exercises their option and wants to buy your shares, you can deliver them immediately. No sweat, no problem, no unlimited risk.

This is the opposite of “naked” options, where people sell options on stocks they don’t own. That’s like renting out a house you don’t actually possess - potentially catastrophic if someone shows up expecting to move in.

The Current Market Reality (Why This Strategy is Hot Right Now)

Here’s what’s happening in the markets right now that makes covered calls particularly attractive:

Elevated Volatility = Higher Premiums

Recent market uncertainty means option premiums are higher than historical averages. Translation: you get paid more rent for the same stock positions.

Low Interest Rates = Income Hunger

With savings accounts paying essentially nothing and bonds yielding peanuts, investors are desperate for income. Covered calls can generate 1-3% monthly returns when executed properly.

Tech Stock Consolidation

Many large-cap tech stocks have been range-bound, making them perfect covered call candidates. Think Apple, Microsoft, Google - stable companies with liquid options markets.

Example with current market data (as of late 2024):

• SPY (S&P 500 ETF) at $555
• Monthly covered calls typically yielding 0.7-1.2%
• Annualized that’s 8-15% income on top of dividends
• Compare that to a 10-year Treasury at 4.1%

The Three Types of Covered Call Outcomes (All Good for You)

Unlike most investment strategies that have complex risk/reward profiles, covered calls have three possible outcomes, and they’re all positive:

Outcome 1: The “Rent Collection” (Most Common - ~75% of the time)

• Stock stays below your strike price
• Option expires worthless
• You keep the premium and still own the stock
• Rinse and repeat next month

Real example: You own 100 shares of Microsoft at $350, sell a $365 call for $4.50. Microsoft stays at $355 at expiration. You keep $450 and can sell another call next month.

Outcome 2: The “Profitable Sale” (~20% of the time)

• Stock goes above your strike price
• Your shares get called away
• You make money on the stock appreciation plus keep the option premium
• Use the cash to buy another stock and start over

Real example: Microsoft goes to $370. Your shares get called away at $365. You made $15 per share on the stock ($350 to $365) plus kept the $4.50 premium. Total profit: $1,950 on a $35,000 investment in one month.

Outcome 3: The “Break-Even Plus” (~5% of the time)

• Stock stays right at your strike price
• May or may not get called away (depends on after-hours movement)
• Either way, you’re profitable due to the premium collected

Common Myths Debunked (What Your Broker Won’t Tell You)

Myth 1: “Options are too risky for regular investors”

Reality: Covered calls are actually less risky than owning stock alone. The premium you collect provides downside protection. It’s like wearing a helmet while everyone else rides their financial bicycles bareheaded.

Myth 2: “You need to be a day trader to do this”

Reality: Covered calls are perfect for buy-and-hold investors who want their stocks to actually work for a living. Set it up once a month, then go back to your actual job. Or get a tool to help you… and you’ll never believe it… but we have just the tool: Start Your Free Trial →

Myth 3: “The math is too complicated”

Reality: If you can calculate a restaurant tip after three drinks, you can understand covered call returns. Don’t let the finance bros convince you otherwise.

Myth 4: “You’ll miss out on big stock moves”

Reality: You cap your upside but get downside protection and consistent income. For most rational humans, predictable monthly income beats praying to the stock market gods for the next 10-bagger.

The Spreadsheet Hell Problem (And Why Your Sanity Matters)

Here’s where the rubber meets the road, and where most people’s covered call dreams go to die in a flaming pile of Excel formulas.

The strategy itself? Simple. Managing multiple covered call positions manually? About as enjoyable as doing your taxes while getting a root canal.

Picture this nightmare scenario:

• 5 different stocks with covered calls
• Different expiration dates (because you’re not a robot)
• Rolling decisions every few weeks based on market movements
• Cost basis calculations that would make a CPA weep
• Performance tracking that requires a PhD in spreadsheet wizardry
• Tax implications that multiply like rabbits

Most investors start enthusiastically with one position, then add a second, then a third. By the fourth position, they’re building elaborate spreadsheets that look like NASA launch calculations. By the fifth, they’re questioning their life choices and wondering if they should have just bought an index fund like their brother-in-law suggested.

The smart money realizes that when you’re trying to track multiple positions, monitor for rolling opportunities, and actually understand whether you’re making money or just creating elaborate homework assignments for yourself, you need tools built by people who understand this specific type of financial masochism.

The “But What If…” Questions (Real Talk About Risks)

Let’s address the elephant in the room. Yes, there are risks, because this is investing, not playing the lottery with better odds. Here’s what can actually go wrong:

Risk 1: Your Stock Takes a Dirt Nap

If your stock drops significantly, you’ll lose money on the stock position. The option premium helps cushion the fall like an airbag, but it doesn’t prevent the crash entirely.

Reality check: This is the exact same risk you’d have owning the stock anyway, except now you have some downside protection from the premium collected. It’s like wearing a seatbelt - doesn’t prevent accidents, but improves your odds of walking away.

Risk 2: You Miss the Next Tesla Moonshot

If your stock rockets past your strike price, you’ll sell at the strike instead of riding the full move up. This is what finance professors call “opportunity cost” and what normal people call “making money but not maximum money.” And as if you keep learning — you’ll Roll right through that making money on the way.

Reality check: You still profit (stock appreciation up to the strike plus the premium). You just don’t make as much as the guy who held on and got lucky. Most rational humans can live with “pretty good profits” instead of “perfect profits.”

Risk 3: Early Assignment (The Boogeyman That Rarely Shows Up)

Occasionally, someone might exercise their option before expiration, usually around dividend dates when they want to capture the dividend.

Reality check: This is like worrying about getting struck by lightning while holding a lottery ticket. It happens, but usually only when it makes financial sense for both parties. You typically just get paid earlier than expected.

Ready to Stop Leaving Money on the Table?

If you’ve made it this far, you understand the fundamentals. Covered calls aren’t rocket science - they’re a straightforward way to generate income from stocks you already own or want to own.

The question isn’t whether you understand the strategy (you do). The question is whether you’re ready to stop leaving money on the table while you wait for your stocks to maybe, possibly, hopefully appreciate someday.

Next Steps:

1. Start Small: Pick one stock you own and understand, you need 100+ shares
2. Paper Trade First: Practice with fake money until you’re comfortable
3. Use Proper Tools: Don’t try to manage this with spreadsheets when you scale up
4. Stay Consistent: The power is in repetition, not home runs

Key Takeaways

What You’ve Learned:

• Covered calls are renting out your stocks for monthly income
• 75% of options expire worthless, meaning you keep the rent most of the time
• Three possible outcomes: collect rent, profitable sale, or break-even plus
• Lower risk than owning stocks alone due to premium income cushion
• Perfect for generating consistent monthly income in range-bound markets

What’s Next: Once you understand the basics, learn “Why Covered Calls Beat Buy-and-Hold” with real historical data that might surprise you.

---

This is Module 1 of our comprehensive covered call education series.

← Back to Module 0: Getting Started | Continue to Module 2: Covered Calls vs Buy-and-Hold → | Start Your Free Trial →