John Jagerson

The Advantages of Covered Calls

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The core principle of writing covered calls is that you are controlling risk and attempting to improve returns on a stock or exchange-traded fund (ETF) that you own.

You can do this by selling a call option against that stock or ETF and collecting the option premium. A covered call consists of a two-step process that is easy to implement by new and experienced investors alike.

The first step in writing a covered call is to be long the underlying stock or ETF.

Sometimes investors are selling a covered call against a stock they may have owned for a long time, and other times an investor may be buying the stock and selling the call option at the same time, which is sometimes called a "buy-write."

The second step in writing a covered call is to sell a call against that long stock or ETF position.

There are several factors to consider when you are selling the call, including expiration date, strike price and premium. In this article we will walk through a case study of a covered call to begin answering these questions.

Before we begin, you may want to check out part one of this series on selling options.

Covered Call Example

Imagine you own 500 shares of Apple (AAPL) and you want to sell five call contracts to make some income from those option's premiums. That trade is a covered call.