The Short Answer: Here Is Exactly What You Do

To sell a covered call, you need to already own at least 100 shares of a stock. Then you sell one call-option contract against those shares through your brokerage, collect the premium upfront, and agree to sell your shares at the strike price if the buyer exercises the option. That is the whole trade in three steps.

This strategy is one of the most beginner-friendly options trades available. The Options Industry Council (OIC) classifies it as a "Level 1" options strategy because your downside is limited to what you already own — not some open-ended loss. FINRA requires brokerages to approve you for options trading, but covered calls are the easiest tier to get approved for because you hold the underlying stock as collateral.

What You Need Before You Place the Trade

Before you can sell a covered call, three things must be in place.

**100 shares minimum.** One standard U.S. options contract covers exactly 100 shares. If you own 250 shares of a stock, you can sell two contracts (covering 200 shares) and keep 50 shares uncovered. You cannot sell a covered call on 50 shares alone.

**Options approval at your broker.** Log into your brokerage account and look for "options trading" in account settings. You will fill out a short questionnaire about your experience and net worth. Covered calls fall under Tier 1 or Level 1 at most brokers — the lowest and easiest level. TD Ameritrade, Fidelity, Schwab, and most Canadian brokers (TD Direct, Questrade, IBKR Canada) all offer this.

**A liquid, optionable stock.** Not every stock has options. Stick to names with high open interest and tight bid-ask spreads — think Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA), or the S&P 500 ETF (SPY). Thin options markets mean you give up money on the spread every time you trade.

Step-by-Step: Placing the Trade on AAPL

Here is a concrete walkthrough using Apple stock.

**The setup.** Suppose you own 100 shares of AAPL, currently trading at $195. You want to generate income without selling your shares right now.

**Step 1 — Open the options chain.** In your brokerage platform, pull up AAPL and click "Options" or "Trade Options." You will see a grid of expiration dates across the top and strike prices down the side.

**Step 2 — Choose an expiration.** Most income-focused covered-call sellers target 30 to 45 days to expiration (DTE). Time decay, measured by the Greek letter theta, accelerates in the final 30 days of an option's life. That works in your favor as a seller. For this example, pick the expiration 35 days out.

**Step 3 — Choose a strike price.** You want to sell a call with a strike above the current price — this is called "out-of-the-money" (OTM). The $200 strike is about 2.6% above the current $195 price. The bid price on that call shows $2.10, and the ask shows $2.20. A mid-price limit order at $2.15 is reasonable.

**Step 4 — Enter a "Sell to Open" order.** In the order ticket, select: - Action: Sell to Open - Contract: 1 (= 100 shares) - Strike: $200 - Expiration: your chosen date - Order type: Limit at $2.15 - Quantity: 1 contract

Hit confirm. If filled, $215 lands in your account immediately (1 contract × 100 shares × $2.15). That cash is yours to keep no matter what happens next.

**Step 5 — Manage or let it expire.** At expiration, one of two things happens. If AAPL stays below $200, the option expires worthless and you keep your shares plus the $215. If AAPL closes above $200, your shares get "called away" — sold at $200 each. You still keep the $215 premium on top of the $200 sale price, so your effective sale price is $202.15 per share.

How to Pick the Right Strike Price

Strike selection is the single biggest lever you control. It sets the trade-off between premium collected and the chance your shares get called away.

**Delta as a quick guide.** Delta tells you roughly the probability the option finishes in-the-money. A call with a delta of 0.30 has approximately a 30% chance of being exercised. Many covered-call sellers target a delta between 0.20 and 0.35 — enough premium to be worth the trade, low enough that assignment is not the most likely outcome. Your brokerage platform displays delta in the options chain.

**OTM vs. ATM vs. ITM.** - Out-of-the-money (OTM): Strike above current price. Lower premium, lower assignment risk. Good for investors who want to keep their shares. - At-the-money (ATM): Strike near current price. Higher premium, higher assignment risk. - In-the-money (ITM): Strike below current price. Highest premium, almost certain assignment. Used when you are comfortable selling at that price.

**Avoid selling through earnings.** If a company reports earnings before your expiration date, implied volatility will spike and then collapse after the announcement. That volatility crush can work against you in unexpected ways. Check the earnings calendar before you sell.

What Are the Real Risks?

Covered calls are not risk-free. Here are the three risks you need to understand before you trade.

**1. Capped upside.** If AAPL rockets from $195 to $230 before expiration, you still sell at $200 (plus keep the $215 premium). Your effective exit is $202.15, not $230. You miss $27.85 per share of upside. This is the most common frustration for new covered-call sellers.

**2. You still own the downside.** If AAPL drops from $195 to $160, you lose $35 per share on the stock. The $2.15 premium softens the blow slightly — your net loss is $32.85 per share — but it does not protect you from a serious decline. The SEC reminds investors that options do not eliminate the risk of owning the underlying stock.

**3. Early assignment.** American-style options (standard for U.S. single stocks) can be exercised any time before expiration, not just at the end. Early assignment is rare but can happen, especially when a stock goes ex-dividend and the call is deep in-the-money. If you are assigned early, your shares are sold immediately. The OIC has detailed materials on early assignment risk in their free educational library.

**The honest summary:** Covered calls work best when you are neutral to mildly bullish on a stock you are comfortable holding long-term. They are an income tool, not a hedge.

Tax Treatment: What the IRS and CRA Say

Tax rules for covered calls are specific and matter more than most beginners expect.

**United States (IRS rules).** The premium you collect is not taxed when you receive it. It is taxed when the position closes — either when the option expires, when you buy it back, or when your shares are called away. If the option expires worthless, the premium becomes a short-term capital gain in the year of expiration, regardless of how long you held the stock. If your shares get called away, the premium is added to the sale proceeds of the stock. IRS Publication 550 covers options taxation in detail. Importantly, selling a covered call can affect the holding period of your shares under the "qualified covered call" rules — potentially converting a long-term gain into a short-term gain if the strike is too deep in-the-money. Consult a tax professional before year-end if this applies to you.

**Canada (CRA rules).** The Canada Revenue Agency treats covered-call premiums as capital gains in most cases for individual investors, but the characterization can shift to business income if you trade frequently. CRA Interpretation Bulletin IT-479R addresses securities transactions. Canadian investors should also be aware that selling covered calls inside a TFSA is generally permitted, but the CRA has challenged aggressive options trading in TFSAs as business income. Again, a tax professional familiar with Canadian securities law is worth consulting.

How to Close the Trade Early

You do not have to hold a covered call until expiration. You can close it any time by buying back the same contract — this is called "Buy to Close."

A common rule of thumb: if the option has lost 50% of its value (you sold for $2.15 and it is now worth $1.07), buy it back and lock in the profit. You free up your shares to sell another call at a later date, a technique called "rolling." Over a full year, rolling covered calls monthly can generate more total premium than holding a single long-dated contract.

To close in your platform: go back to the options chain, find the same contract you sold, and place a "Buy to Close" limit order at or near the current ask price. Once filled, your obligation is gone and your shares are free.

How much money do I need to start selling covered calls?

You need enough capital to own at least 100 shares of an optionable stock. For AAPL at $195, that is roughly $19,500. Cheaper stocks like Ford (F) or a low-priced ETF can lower the entry point significantly. There is no additional margin required because your shares serve as the collateral.

What happens if my covered call gets assigned?

If the stock closes above your strike at expiration, your broker automatically sells your 100 shares at the strike price. You keep the premium you collected plus the proceeds from the stock sale. Assignment is not a loss — it just means you sold your shares at the price you agreed to when you entered the trade.

Can I sell a covered call in my IRA or TFSA?

Yes. Most U.S. brokers allow covered calls inside a traditional or Roth IRA because the strategy is considered low-risk. In Canada, covered calls are generally permitted inside a TFSA or RRSP, but the CRA monitors frequent options trading in registered accounts for potential reclassification as business income.

How do I choose between a weekly and a monthly expiration?

Weekly options expire every Friday and offer faster premium collection but require more active management. Monthly options (typically the third Friday of each month) have higher absolute premiums and need less attention. Most beginners start with 30-to-45-day monthly expirations to keep the workload manageable.

What is the difference between a covered call and a naked call?

A covered call is backed by shares you already own, capping your risk to the opportunity cost of missing upside. A naked call is sold without owning the underlying stock, creating theoretically unlimited loss if the stock surges. FINRA requires a much higher options approval level — and significant margin — to sell naked calls.

Does selling a covered call affect my stock's cost basis?

The premium you collect does not directly reduce your cost basis while the position is open. However, if your shares are called away, the IRS treats the premium as part of your sale proceeds, which effectively raises your net selling price. IRS Publication 550 has the full details on how options affect stock transactions.