Covered Call FAQ for Beginners

Starting your covered call journey? We’ve got answers.

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Welcome to covered calls 101! If you’re here, you’re probably curious about this “rent collection on stocks” thing you keep hearing about, but you’ve got questions. Good. Questions are how you avoid expensive mistakes.

Quick Navigation:

• Covered Call Basics | How to Get Started with Covered Calls | Covered Call Risks & Strategy | Practical Covered Call Questions

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Covered Call Basics

What is a covered call?

A covered call is when you own 100 shares of stock and sell someone else the right to buy those shares from you at a specific price by a specific date. In exchange, they pay you money upfront (called a “premium”).

It’s like renting out a room in your house - you collect rent money while still owning the property. If they decide to “buy the house” (exercise the option), you sell at a price you already agreed was acceptable.

Learn more: What Are Options? Complete Guide

What is a covered call example?

Here’s a real covered call example:

You own 100 shares of Apple (AAPL) that you bought at $180. Apple is currently trading at $185. You sell a covered call with a $195 strike price expiring in 30 days for $3.50 per share.

What happens:

• You collect $350 immediately ($3.50 × 100 shares)
• If Apple stays below $195: Option expires worthless, you keep the $350 and still own your Apple shares
• If Apple goes above $195: Your shares get called away at $195, you keep the $350 premium

Your profit either way: At minimum $350 in premium. If called away, you also make $15 per share on the stock ($180 cost to $195 sale) plus the $350 premium = $1,850 total profit.

Or, in the immortal words of Macklemore: “$350 in my pocket, this is f@$king awesome.”

How do options work for beginners?

Options give you the right (but not obligation) to buy or sell a stock at a specific price by a specific date. You pay a premium upfront for this right. Most options expire worthless, which is why selling options (like covered calls) is generally more profitable than buying them.

Think of it like insurance: you pay a premium for coverage you hope you’ll never need. With covered calls, you’re the insurance company collecting premiums.

Are options gambling or investing?

Most options strategies are gambling - you’re betting on direction and timing. Covered calls are different because you’re generating income from stocks you already own, making them an investment strategy rather than speculation.

The key difference: gamblers hope to be right about market movements. Covered call investors get paid regardless of small market movements.

What’s the difference between covered calls and buying calls?

Buying calls: You pay money hoping the stock goes way up. If you’re wrong, you lose everything. Success rate: ~25%.

Covered calls: You collect money while owning the stock. You profit if the stock goes up, stays flat, or goes down a little. Success rate: ~75%.

One is speculation, the other is income generation.

Why are covered calls better than just owning stocks?

Covered calls give you three ways to make money instead of one:

1. Stock appreciation (if it goes up to your strike price)
2. Premium income (you keep this no matter what)
3. Dividend income (if the stock pays dividends)

Plus, the premium provides downside protection. If the stock drops, you lose less than a buy-and-hold investor.

Learn more: Why Covered Calls Beat Buy-and-Hold

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How to Get Started with Covered Calls

How much money do I need to start?

You need enough to buy 100 shares of stock, typically $5,000-$50,000 depending on the stock price.

Examples:

• Ford (F) at $12: $1,200 for 100 shares
• Apple (AAPL) at $185: $18,500 for 100 shares
• S&P 500 ETF (SPY) at $475: $47,500 for 100 shares

Start with one position to learn, then scale up as you get comfortable.

Which broker is best for covered calls?

Any major broker works fine for covered calls. Look for:

• Low option commissions (most charge $0.50-$0.65 per contract)
• Easy options approval (Level 2 is usually sufficient)
• Good mobile app (for monitoring on the go)
• Decent research tools (for stock selection)

Popular choices: Fidelity, Schwab, TD Ameritrade, E*TRADE, Interactive Brokers.

Should I start with ETFs or individual stocks?

ETFs are better for beginners because they’re less volatile and diversified. Start with:

• SPY (S&P 500) - Broad market exposure
• QQQ (NASDAQ 100) - Tech-heavy, higher premiums
• IWM (Russell 2000) - Small caps, good premiums

Individual stocks can be more profitable but require more research and carry single-company risk.

What happens if my call gets assigned?

Assignment is usually good news! It means:

1. Your stock went up above your strike price
2. You sell your shares for the strike price (profit on the stock)
3. You keep the premium you collected upfront
4. You have cash to buy another stock and start over

Assignment isn’t something to fear - it’s one of your profitable outcomes.

How do I pick my first stock for covered calls?

Look for stocks that:

• You’d be happy to own anyway (good fundamentals)
• Trade above $20 (better option premiums)
• Have liquid options (tight bid-ask spreads)
• Aren’t too volatile (easier to manage)
• Pay dividends (bonus income)

Beginner-friendly examples: AAPL, MSFT, JNJ, KO, PG, or ETFs like SPY, QQQ.

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Covered Call Risks & Strategy

What are the risks of covered calls?

The main risks are:

1. Stock declines significantly - You lose money on the stock (but less than buy-and-hold due to premium cushion)
2. Missing big upside moves - Your gains are capped at the strike price
3. Early assignment - Rare, usually around dividend dates

Key point: Covered calls are generally less risky than owning stock alone because the premium provides downside protection.

Can I lose more than I invest?

No. With covered calls, your maximum loss is the same as owning the stock outright, minus the premium you collected. You can’t lose more than 100% of your stock investment, and the premium cushions your losses.

This is very different from naked options, which can have unlimited losses.

What if the stock goes down?

You lose money on the stock position, but less than a buy-and-hold investor because you collected premium. You keep your stock and can sell another covered call the next month.

Example: Stock drops from $50 to $45, but you collected $2 premium. You’re down $3 per share instead of $5.

What if the stock goes way up?

Your stock gets called away at the strike price. You miss the gains above your strike, but you still profit from:

• Stock appreciation up to the strike price
• The premium you collected
• Any dividends received

Example: You sell a $55 call on a $50 stock for $2 premium. Stock goes to $65. You sell at $55, keep the $2 premium. Total profit: $7 per share instead of $15. Still profitable, just not maximum profit.

What is the best covered call strategy for beginners?

The “Conservative Income” strategy works best for beginners:

1. Choose stable stocks or ETFs you’d own anyway (Apple, Microsoft, S&P 500 ETF)
2. Sell calls 5-10% above current price (out-of-the-money)
3. Use monthly expirations (easier to manage)
4. Target 1-2% monthly income (12-24% annualized)
5. Start with one position and scale up slowly

Why this works: You get upside participation, reasonable income, and lower assignment risk while learning. It’s the covered call equivalent of training wheels - boring but effective.

Are there any hidden fees or taxes I should know about?

Fees: Option commissions (typically $0.50-$0.65 per contract) and standard stock trading fees.

Taxes: Option premiums are generally taxed as short-term capital gains. Stock sales depend on how long you held the shares. Keep good records.

No hidden fees, but taxes can be complex with active covered call writing. Consider consulting a tax professional if you’re doing this at scale.

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Practical Covered Call Questions

How often should I sell covered calls?

Most investors sell monthly options, but you can adjust based on:

• Market conditions (higher volatility = higher premiums)
• Your time availability (monthly is manageable for most people)
• Stock-specific events (earnings, dividends, etc.)

Start with monthly and adjust as you gain experience.

How do I sell covered calls step-by-step?

Here’s the exact process:

1. Own 100+ shares of the stock (or buy them first)
2. Log into your broker and navigate to options trading
3. Select “Sell to Open” (not buy) and choose “Call”
4. Pick your strike price (typically 5-10% above current price)
5. Choose expiration date (monthly expirations are most liquid)
6. Enter your order and review the premium you’ll receive
7. Submit the trade and collect your premium immediately

Important: Make sure you’re selling covered calls, not naked calls. Your broker should automatically recognize you own the stock.

First time? Many brokers have “covered call” as a specific order type that makes this simpler.

What strike price should I choose for my first trade?

For beginners: Choose a strike price 5-10% above the current stock price (out-of-the-money). This gives you:

• Upside participation if the stock rises
• Lower chance of assignment while learning
• Reasonable premium income

As you get comfortable, you can experiment with different strikes based on your outlook.

When should I close a covered call position early?

Consider closing when:

• Option is worth 10-20% of original premium (take profits early)
• Major news affects the stock (earnings surprise, etc.)
• You want to sell the stock for other reasons

You can always buy back the option and sell the stock separately.

What tools do I need to track my positions?

Start simple: Most brokers provide basic tracking. For multiple positions, you’ll want:

• Spreadsheet or portfolio tracker (free option)
• Dedicated covered call platform like Cover My Assets (paid option)
• Option analysis tools for strike selection

As you scale up, manual tracking becomes painful. That’s when platforms become valuable.

How do I know if I’m doing this right?

Track these key metrics:

• Monthly income generated (premium collected)
• Annualized return (what your monthly income equals per year)
• Assignment rate (how often you get called away)
• Overall portfolio performance vs. buy-and-hold

Good benchmarks: 1-3% monthly income, 12-36% annualized returns, depending on market conditions and strategy.

How do I calculate covered call returns?

Basic covered call calculator formula:

Monthly Return = Premium Collected ÷ Net Investment

Example:

• Stock price: $100
• Premium collected: $2
• Monthly return: $2 ÷ $100 = 2%
• Annualized return: 2% × 12 = 24%

For more complex calculations:

• Return if called away: (Strike Price - Stock Cost + Premium) ÷ Stock Cost
• Return if flat: Premium ÷ Stock Cost
• Break-even point: Stock Cost - Premium Collected

Most brokers provide basic calculators, but as you scale up, dedicated tools become helpful for managing multiple positions.

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Ready for the Next Level?

Still have questions?

• Intermediate FAQ - Strategy optimization and decision-making (Coming Soon)
• Academy - Complete learning modules from beginner to advanced
• Blog - Latest market insights and strategy updates

Want to learn the complete strategy?

Start with our Academy modules:

1. Module 0: What Are Options? - Foundation concepts
2. Module 1: WTF is a Covered Call? - Strategy mechanics (Coming Soon)
3. Module 2: Why Covered Calls Beat Buy-and-Hold - Performance comparison (Coming Soon)

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