Some offers on this page are from advertisers who pay us, which may affect which products we write about, but not our recommendations. See our Advertiser Disclosure. Covered calls generate premium income from stocks you already own.
Learn how the strategy works (with a step-by-step example) and understand the risks and downsides before you start. A covered call is an options contract that investors can sell to generate income from the securities they own. The two components of the name describe the contract's primary characteristics: Call: An investor who sells a call option must, upon request and prior to the contract expiration, sell securities at an agreed price.
The option seller, called the writer, collects a nonrefundable premium from the buyer, who pays for the right to buy the securities. Option buyers are called holders. Covered: Covered indicates the option writer owns the underlying securities.
If the writer does not own the underlying securities, the option is called a "naked" call. Importantly, the distinction between covered and naked is on the writer's side. The option buyer does not know whether the contract is collateralized.
For that reason, covered calls are usually defined and discussed from the writer's perspective. Writers typically sell covered calls to generate income or to secure a target selling price for the stock. When income is the goal, the option can be structured so it's less likely to be exercised.
If the holder does not exercise the right to buy the shares, the option expires without value. The writer then keeps the underlying shares and the premium earned for selling the contract. If a targeted sale is the goal, the writer sets a realistic strike price, hoping to earn income and sell the security as part of the same strategy.
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