What is a covered call in one paragraph?

A covered call is when you own 100 shares of a stock and sell someone the right to buy those 100 shares from you at a higher price within a set time. In exchange, you collect a cash payment up front called the premium. If the stock doesn't reach that higher price by the deadline, you keep both your shares and the cash. If it does, you sell your shares at the higher price and still keep the cash.

It's the most basic options income strategy and the only one most retail brokerages allow in retirement accounts.

Why this is the first options strategy most people learn

Three reasons. First, the math is intuitive: you already own the stock, you're collecting cash for agreeing to sell at a price you'd be happy with. Second, the maximum loss isn't worse than just owning the stock — the option doesn't add downside, it just caps the upside. Third, most brokerages classify it as Level 1 or Level 2 options approval, available in IRAs in the US and TFSAs in Canada in a way that more complex strategies aren't.

A real worked example with numbers

You own 100 shares of Apple (AAPL), bought at $180/share. AAPL is currently trading at $195/share. You think the stock might drift up but probably won't hit $210 in the next month.

You sell one June 20 $210-strike call option. The current premium for that contract is $3.50 per share, which means $350 cash deposited in your account today (each contract covers 100 shares).

Three things can happen between now and June 20.

Scenario A — AAPL stays under $210. The option expires worthless. You keep the $350 premium AND you still own your 100 shares of AAPL. You can sell another covered call for July expiration if you want. Net result: $350 income on a $19,500 position ≈ 1.8% in 30 days, plus whatever AAPL did.

Scenario B — AAPL goes above $210. At expiration, your shares are called away — sold to the option buyer at $210, regardless of what AAPL is actually trading at. You collect $21,000 for your shares (100 × $210) PLUS the $350 premium you collected up front PLUS your original cost basis means you keep the full $30/share gain ($180 → $210). Total profit: $30/share × 100 shares + $350 = $3,350. The trade-off: if AAPL is at $225, you missed the extra $15/share — that $1,500 of additional upside went to the option buyer.

Scenario C — AAPL drops to $170. The option expires worthless. You keep the $350 premium. But you're now sitting on 100 shares worth $17,000 instead of $19,500. The premium softens the loss but doesn't eliminate it. Net portfolio value: $17,350 vs. $19,500 starting — a $2,150 unrealized loss instead of a $2,500 loss. The covered call doesn't protect against the stock dropping; it just offers a small cushion.

When this strategy makes sense

You're holding a stock you're comfortable owning at its current price, you don't expect it to rocket up in the near term, and you'd be content selling it at a price somewhat above where it is now. Covered calls turn time + sideways action into income. They are not a hedging strategy and they are not a way to generate income on stocks you don't actually want to own.

When this strategy does NOT make sense

A few common mistakes.

On a stock you'd hate to sell at the strike price. If you'd be furious to lose AAPL at $210 because you think it's going to $300, don't sell the covered call. The premium isn't worth the regret.

Right before a major catalyst. Selling covered calls into an earnings report is selling vol cheap — you're giving the option buyer your upside for a fixed premium during a moment when the stock might move 10%+.

On a stock you bought specifically because you think it's about to break out. You're capping the exact gain you bought the stock to capture.

As a way to lower your cost basis on a falling stock. A common misconception. Premium income is real but doesn't change cost basis for tax purposes, and using covered calls to rescue a losing position often locks in mediocre exits.

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

Enough to own 100 shares of a single stock (or 100 shares of an ETF). For a $50 stock that's $5,000; for AAPL at $195 it's about $19,500. Brokerages require the actual shares in your account as collateral — you can't sell a covered call on stock you don't own.

What happens if I want to keep my stock and the option goes in-the-money?

You can roll the option — buy back the current call (at a loss) and sell a new call at a higher strike or later expiration. You typically pay a small net debit to buy time. This works but should be a deliberate choice, not a panic move; consistently rolling losing calls erodes the income the strategy is supposed to generate.

How is the premium I collect taxed?

In the US, premium from a covered call is generally short-term capital gain (taxed at ordinary income rates) when the option expires worthless. If your shares are called away, the cost-basis math changes — see IRS Publication 550 for the full treatment. Tax outcomes vary by holding period and qualified status of the covered call; consult a tax professional for your situation.

Can I sell covered calls in my Roth IRA or TFSA?

Most brokerages allow Level 2 options (which includes covered calls) in Roth IRAs in the US and TFSAs in Canada. Specific rules vary by brokerage and account type. Confirm with your broker before placing the trade.

What's the difference between a covered call and a cash-secured put?

A covered call is selling someone the right to buy your stock at a higher price. A cash-secured put is selling someone the right to sell you a stock at a lower price (with cash set aside to buy if assigned). They are mirror-image strategies on opposite sides of the trade. The wheel strategy alternates between them.

Can the stock be called away early?

Yes — American-style options can be exercised any time before expiration. Early assignment is rare but happens most often right before an ex-dividend date if the dividend exceeds the remaining time value of the option. For most stocks most of the time, early assignment is uncommon.