Covered Calls: Selling Upside for Income
A covered call is the simplest income strategy in options. You own at least 100 shares of a stock and sell a call against them — agreeing to deliver the shares at a specified price if the stock rises above that level by expiration. In exchange, you collect premium today. The trade is honest: you sell some of the future upside in return for income now. It works best on stocks you would still be content to own through volatility — and badly on stocks you should not have owned in the first place.
The Mechanics
One contract represents 100 shares. You sell one call at a chosen strike and expiration, premium hits the account immediately. If the stock closes below the strike at expiration, the call expires worthless — you keep the premium, you keep the shares, and you can repeat the trade. If the stock closes above the strike, the shares are called away at the strike price. Profit is capped at strike minus cost basis, plus the premium received.
Strike Selection
The strike defines the entire trade. Out-of-the-money strikes offer lower premium but higher probability the shares are kept. At-the-money strikes maximize premium per day of time decay but also maximize the chance of being called away. Delta is the cleaner guide than absolute strike: a 0.20 delta call has roughly a 20% probability of expiring in-the-money. Pick the strike that matches your view, not the strike that pays the most premium.
The Trap — Covered Calls on Falling Stocks
This is the failure mode that ruins inexperienced sellers. The premium received is small — typically 1–3% per month — relative to the downside on the underlying. If the stock drops 20%, the premium does not save the position. Covered calls slightly reduce cost basis. They do not protect a thesis going wrong. The discipline is to write calls on stocks the portfolio is still happy to own, never on weak names to “make back” a loss.
Closelook Application
The Derivatives Portfolio writes covered calls on names from the active portfolios — Global Tech 50, AI Buildout, Hypergrowth — that have run hard and where the desk is willing to trim into strength. The covered call becomes a structured “sell on strength” with income attached, sized around expiration cycles of 30–45 days where theta decay is most efficient.