Covered Call Options Strategy: A Beginner's Guide (2024)

Learn the essential pieces of the covered call options strategy in my newest tutorial!

The covered call strategy is super popular because it's an easy way for long-term stock investors to boost potential returns while waiting to sell shares at a higher price, or reduce loss potential on the shares.

A covered call consists of buying 100 shares and shorting a call option. If the stock is below the call's strike price at expiration, the trader makes a 100% profit on the short call as it expires worthless. The trader can sell a new call in the next expiration cycle to collect more premium and keep the strategy going.

If the stock is above the call's strike price at expiration and the trader does nothing, the trader will get assigned on the short call and sell their 100 shares at the call's strike price. The trade realizes the max profit potential, but the shares are lost.

In this video, you'll learn the essentials of this popular options trading strategy with historical trade examples visualized with real option data.

I also do a live trading session where I enter a covered call position on tastyworks, wait a few days, and exit the position before expiration. I explain why the position made/lost money.

0:00 Introduction
0:28 What is a Covered Call?
1:44 Basic Covered Call Example & Risk Graph
3:30 Historical Trade Example #1
4:31 Max Profit Calculations (Two Approaches)
6:15 Historical Trade Example #2
7:48 Historical Trade Example #3
9:31 What Happens to Covered Calls at Expiration?
10:11 Securing Partial Profits on the Short Call
10:52 Buying Back the Short Call for a Loss
11:56 What Happens After Expiration?
13:44 How to Choose a Call to Sell?
16:22 LIVE Covered Call Trading on tastyworks: Entry & Exit
28:11 Best Time to Enter a CC?
29:29 Can I Trade a CC With Less Money?
30:00 Do I Have to Hold to Expiration?
30:43 How to Avoid Short Call Assignment?

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Disclaimer: Nothing contained in our content constitutes a solicitation, recommendation, promotion, or endorsement of any particular security, other investment product, transaction, or investment. Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involve substantial risk of loss and are not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. Past performance is not necessarily indicative of future results. I am not a financial advisor. The ideas presented in this video are for entertainment purposes only. You (and only you) are responsible for the financial decisions that you make.

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[alwaysaa]

I'm not sure how I stumbled across you, but I am thrilled that I did. I'm very much a beginner at all of this and it's so confusing at times. You are the first person that makes sense to me. I have only watched a couple of your videos and I already have a much greater knowledge of how everything works. Thank you for helping me maneuver through the sludge of it all. I'm looking forward to watching all of your videos. Keep them coming and thanks again.

[paulmarshall]

Good review of covered calls. I use them a lot. I have shares in one company that I have been trading since 2017. The shares pay a monthly dividend but to generate even more cash flow I have been writing covered calls on the shares. I have actually made more on the options selling than on the dividends paid. I did let some of my shares be assigned as I my strike price was over double my original cost per share so I decided to take some of the profit. At the moment I still hold a number of shares but because of the money I have made from dividends, options premium, and the capital gains on the shares I sold, the current shares I own have been completely paid for with the money gained. So now I continue to receive monthly dividends, continue to collect premium from writing covered calls, and if the shares get assigned I am still in a profit position. Currently my position is in the money so once the option gets closer to the expiry date I will have to decide if I will buy them back or let them get assigned. Who knows, the price may drop and will expire worthless. Time will tell.

[Ambitious_Achiever]

I think I needed to take the time and write this comment to thank you. I find so smart and convenient that your YouTube videos match, your website's explanation. This is very efficient, and straight to the point. Thank you very much for sharing your knowledge. I hope I get to meet you personally someday. Greetings from a Venezuelan living in Germany.

[HefTrade]

As always, fantastic video Chris! I sent this one to my Dad and Uncle to help teach them about how they can sell stock they have in their retirement accounts. Thanks for the graphics and all your hard work. I doubt anyone can make as clear of a video for CCs as this one. Merry Christmas and Happy New Year!

[brayellison]

Glad to see you're back! Love your videos. It would have been nice to see selling an ITM put as an equivalent to a CC position, except with a lower BP effect.

[eliefeinstein]

Great video! When you get a chance, could you make a video comparing the pros and cons of trading options on stock as opposed to ETFs?

[rrad]

Thanks for sharing your knowledge. Your videos are the best.

[Archie-tdox]

Excellent content. This really helped a lot! Very detailed, very simply explained. Thx

[sleddy]

Really good explanation for something I have had a hard time getting my head around.

[agentsancho]

Everytime I watch one of your videos I feel like I am stealing something. Your shared knowledge is underrated.

[mustafaal-humairi]

Hey Chris it seems to me you recently stopped talking about other strategies and mostly focusing on the cover calls. Have you discovered after all of these years that the cover call is the best strategy of them all?. Thank you

[michyshark]

Hello, great video. Let’s say that I borrowed the volatile asset so that I hedge the downside risk of such asset. How can I also mitigate or hedge the impermanent loss of the price going higher than the strike price?

[lucas_explore]

great tutorial, appreciated the amzn example (:

[PinkFloydTheDarkSide]

In the first example, if strike price at 125 was hit, won't the premium of covered call go up as well leaving us a big loss? 1.41 was premium when SP was 121, now stock price is 125+, premium will definitely be much higher. But I don't see you including that in your equation. Am I getting it wrong?

[AnglBunny]

This was the most helpful video on options that I have ever watched in my whole, entire life. Thank you so much for posting this.

[gonzo]

Hi Chris, I wonder if you have an opinion on Tastylive's Lookback backtester and if you would recommend any other software (free or not).
Specifically, I'm unsure what stop-looses mean on these tests. I don't know if contracts are immediately opened after a stop (just like a roll), or if your exposure is closed until the next scheduled contract opens.

[linhtiensaphora]

Fantastic video Chris. I have watched your PMCC. Can you please make a video of Poor Man Covered Put?. I am a poor Beginner, so I don't know if this exists. Thanks.

[postedback]

i think one thing is missing from the video - dividend risk. Especially for poor man covered call

[mwfdude]

would there be any benefit to buying a cc that is heavily already ITM?

[sonalikara]

Question- so on expiry of my covered call if strike price is higher than current stock price why cant I exercise n sell at strike price? After all when stock is higher than strike price shares get assigned so why not when strike price is higher than stock price??