Covered Calls — The Dollar Dictionary

Ads end in 20 seconds

Loading location...

This content is free thanks to our sponsors

Sponsored Ad – I may earn a commission if you click and buy

Next ad in 5s

You are about to visit an external website.

This is an affiliate link, and we may earn a commission.

Continue?

Investment

Covered Calls

An options strategy where you sell someone the right to buy your shares at a set price — collecting the premium as income while you continue holding the stock.

The mechanics: to sell a covered call, you must own at least 100 shares of the underlying stock (options contracts are for 100 shares). You choose a strike price (the price at which you'd sell your shares if exercised) and an expiry date. The buyer pays you a premium upfront regardless of what happens. You keep the premium no matter what. If the stock stays below strike at expiry, the option expires worthless — you keep the premium and your shares. If it rises above strike, your shares get called away at the strike price — you keep the premium plus the gain up to strike, but miss any upside beyond it.

The risks: if the stock falls sharply, the premium collected provides only a small cushion against losses — you still own the shares losing value. And if the stock rockets dramatically above your strike (like a takeover bid), you've capped your gain at the strike price while still holding the downside risk. Covered calls work best in flat to slightly rising markets and for investors who are comfortable selling their shares at the strike price if needed.

A covered call is renting out your shares. You own 100 shares of Apple. You sell someone the option to buy those shares from you at £200 anytime in the next month — they pay you £3 per share (£300 total) for that right. If Apple stays below £200, the option expires worthless and you keep the £300 premium plus your shares. If Apple shoots to £250, they buy your shares at £200 — you miss the upside above £200, but you still made money. It's income generation with a ceiling on your gains.

Real world: Income-focused investors use covered calls systematically to generate monthly cash from stock portfolios they intend to hold long-term anyway. A portfolio of £100,000 in dividend stocks might generate 2-3% in dividends annually — adding a covered call strategy on top could generate an additional 4-8% in premium income per year, significantly boosting total returns without selling a single share. ETFs like QYLD (Global X Nasdaq 100 Covered Call ETF) do this systematically and distribute monthly income to investors.

💡 Covered calls turn stock ownership into a rental income stream — you collect premiums for agreeing to sell at a price you'd be happy with anyway, and keep earning as long as the option isn't exercised.

← Back to The Dollar Dictionary