Covered Call Strategy
BeginnerMonthly expiration cyclesOptions
Strategy Overview
Generating income by selling call options against stock holdings.
How It Works
The covered call strategy involves owning 100 shares of stock and selling call options against those shares to generate income. This conservative strategy works best with stocks you're willing to hold long-term but don't expect significant near-term appreciation. The premium collected provides downside protection and additional income, but caps upside potential if the stock rises above the strike price. It's ideal for generating consistent monthly income in sideways or slightly bullish markets.
Setup Rules
- 1Own 100 shares per contract
- 2Stock should be quality company
- 3Implied volatility elevated
- 4Not expecting big moves up
- 530-45 days to expiration ideal
Entry Rules
- Sell calls 1-2 strikes OTM
- Target 1-2% monthly premium
- Higher IV = better premiums
- Avoid selling before dividends
Exit Rules
- Let expire worthless (keep premium)
- Buy back at 50% profit if quick
- Roll if stock approaches strike
- Accept assignment if ITM at expiration
Risk Management
- Don't sell calls below cost basis
- Keep some shares uncovered for upside
- Avoid before earnings/events
- Have exit plan if stock drops
Advantages & Disadvantages
Advantages
- • Generate monthly income
- • Reduce cost basis over time
- • Lower portfolio volatility
- • Simple to execute
Disadvantages
- • Limits upside potential
- • Stock can still decline
- • May miss big rallies
- • Tax implications if called
Best Market Conditions
Sideways to slightly bullish markets