Of all the different ways you can make money trading options, selling covered calls is one of the most popular – and yet, one of the most complex and misunderstood stock investment strategies.

While it offers substantial upside with fairly limited downside, actually selling covered calls involves many moving parts. That’s why we created this resource on how to sell covered calls, whether you use Fidelity, Schwab, Vanguard, Robinhood, or any other brokerage. Here’s an overview of the process:

  1. Own 100 shares of a stock you believe will remain fairly stagnant in a specified timeframe.
  2. Create an options contract with a well-thought-out strike price and expiration date.
  3. Sell the options contract through your brokerage.
  4. Monitor the position and roll the options contract to a later date if necessary.
  5. Manage expiration and exercise.

That’s it – 5 simple steps stand between you and your first successful covered call transaction. We’ll walk you through the nuances of each aspect so you can feel confident getting started.

But to streamline the process and stack the deck in your favor, we encourage you to leverage the VectorVest stock software – the best app for stock analysis you have at your disposal.

With the OptionsPro integration you’re not just choosing the best stocks but also configuring contracts in a manner that maximizes premium earned while reducing risk and ensuring you win more trades than you lose. See what makes it the best stock research website today!

The Basics of Selling Covered Calls

It’s important that you understand the basics of stock options for beginners, including a few key terms associated with this approach to investing, before jumping into selling covered calls. So, what are stock options and why should you learn how to sell options in the first place?

How it Works

First, you need to know the difference between call vs put options. A call option grants the holder the right, but not the obligation, to buy the stock at a predetermined price before a predetermined date.

So, this specific strategy involves holding a long position in a stock and selling call options on that same stock. This allows you to earn a premium from selling the call option while still holding the underlying stock.

What happens when options expire? If the stock price stays below the strike price, that would be considered a successful covered call – you keep the premium and retain ownership of the stock. 

But if the stock price exceeds the strike price and the holder chooses to exercise the option, you must sell them stock at the strike price, potentially missing out on some gains but still profiting from the premium and the stock’s appreciation up to the strike price.

Key Terminology

You might be scratching your head at some of the terms we’ve used thus far – premium, strike price, etc. Here are some of the definitions you need to grasp before we move forward:

  • Premium: The income you receive by simply selling the call option, paid by the buyer for the right to exercise the option. The specific premium paid is influenced by the likelihood of a contract ending up in the money (which favors the buyer, not the sellers).
  • Strike Price: The set price at which the call option can be exercised. 
  • Expiration Date: The date on which the option contract expires and can no longer be exercised.

Benefits

So, what are the benefits of trading stock options through a covered call strategy? The most obvious is additional income earned through premiums, which can enhance overall returns, especially in a flat or mildly bullish market.

The premium income also provides a cushion against minor declines in the stock price, potentially reducing the overall loss on the stock. If the stock price drops a bit, you could still end up profitable overall.

This strategy is also very flexible. You can tailor contracts to meet your risk/reward preferences by tweaking the strike price and expiration date. The more favorable terms are for you as a seller, the lower the premium you’ll receive, and vice versa.

Drawbacks

There are also downsides to this strategy, the most notable being that your upside is capped. If the stock price rises significantly above the strike price, the option will more than likely be exercised and you must sell the stock at the lower strike price, missing out on potential gains.

As far as when to sell options through this strategy goes, you can see why it’s not ideal in very bullish markets. You’re going to end up making less money than you would by simply holding the stock and cashing it for profit yourself.

There’s also the complexity of learning how to sell covered calls. Although simpler than other options strategies, it still requires careful monitoring and meticulous decision-making, particularly when deciding whether to roll options or let them expire.

Don’t worry – just about all the downsides to selling covered calls can be alleviated when you set yourself up for success with the best beginner investment app, VectorVest. 

You can use our options trading tools to boost odds in your favor. It’s almost like a cheat code for investing that gives you an edge in any market. More on that – for now, let’s walk you through the strategy step-by-step below.

How to Sell Covered Calls: Step-by-Step Guide to Selling Covered Calls

While learning how to sell a covered call options contract can be overwhelming compared to traditional stock trading, we’re here to simplify it for you. First, let’s talk about choosing a stock.

Choose a Stock if You Haven’t Already

Maybe you already own a stock that you don’t expect to move much over the coming weeks or months. That’s a perfect candidate for selling covered calls, as you want moderate volatility. 

If a stock price is too stagnant you’ll have a hard time finding someone willing to buy the contract, or you’ll have to sacrifice a premium and earn very little. 

On the other hand, volatile stocks are harder to create predictable outcomes with. There’s a middle ground you should focus on.

Don’t have any long positions that make sense for selling a covered call? No worries – we have a great resource on how to find stocks for options trading. 

Like we said, your stock picking strategy should focus on finding a stock with a stable price and a track record of steady performance. Stocks with high liquidity are preferred, as they have more active options trading, making it easier to sell call options.

We’ve found that stocks backed by dividends work exceptionally well for a few reasons – first and foremost they align with the guidelines we just explained. But, they also offer supplemental income as you maintain a long position. 

Learn more about how to invest in dividend stocks or read our lists of the high dividend stocks or safest dividend stocks. Better yet, see how much easier finding opportunities can be when you leverage the best stock picking app, VectorVest. 

Pick the Strike Price and Expiration Date

After finding a worthy candidate, make your long position for at least 100 shares. That’s the standard quantity for selling covered calls. 

The next step is to start piecing your options contract together, finding the balance between stacking the odds in your favor without sacrificing too much premium. 

The strike price in option trading should be far enough above the current market price of the stock to maximize your premium income while keeping the likelihood of the option being exercised manageable. 

The expiration date can vary, but many investors prefer a 1-2 month timeframe to balance premium income with the flexibility to reassess market conditions frequently. Learn more about when do stock options expire in our blog.

Again, the VectorVest stock advisory has options features that help you find the sweet spot that maximizes premium income while still protecting yourself from the likelihood of the option being exercised. 

You gain access to a variety of tools that empower you to earn the best returns with as little risk as possible. If you’re serious about learning how to sell covered calls, this is a must-have in your trading arsenal.  

Sell the Call Option Through Your Brokerage

With the specificities of your options contract configure, you can now log into your trading brokerage and sell the call contract. The process will be more or less the same whether you’re selling covered calls on Schwab, Fidelity, or any other.

Monitor the Position and Consider Rolling the Option

At this point, most of the work is done. Now, it’s a waiting game that requires you to monitor the stock price relative to the strike price as the expiration date approaches.

If the stock price is nearing the strike price and you want to avoid having your shares called away, you might consider “rolling” the option. This involves buying back the current call option and selling a new one with a later expiration date and possibly a different strike price.

Manage Expiry and Exercise

Remember, there are a variety of potential outcomes when selling covered call contracts. 

The ideal scenario is that the stock price rises to just below the options contract, meaning that the buyer would not want to exercise the option. This way, you earn the premium while still benefiting from the stock appreciation as the option expires worthless.

However, the buyer will more than likely exercise stock options if the stock price moves above the strike price. You are then required to sell them your position, which isn’t the end of the world. You still come out profitable from the premium and the proceeds from selling your stock at a higher price than you bought it for.

The worst case scenario is if the stock price moves substantially higher than the strike price, at which you are missing out on more gains. Even still, though, you don’t lose money on this trade – you just have to deal with the opportunity cost, which can be tough to stomach.

Now – if the stock price plummets before expiration, you don’t have to worry about the buyer exercising the contract. You do, however, need to consider cutting losses on your long position to protect from additional losses. Learn more about when to sell stocks in our blog.

Set Yourself Up for Success Selling Covered Calls With VectorVest!

You now know how to sell a covered call! So, why not take the first step today and get yourself set up with VectorVest, supercharging your success rate with a suite of tools that stack the deck in your favor?

VectorVest is a proprietary stock rating system that simplifies any trading strategy, whether you’re trading stocks vs options. It takes complex stock indicators and convoluted financial data and transforms them into clear, actionable insights to save you time and stress while reducing emotion and human error.

You’re given a clear buy, sell, or hold recommendation for any given stock at any given time, and you can even pull up a list of great stock picks to find your next opportunity if you don’t know where to start. 

We have screeners for options traders specifically, or you can find aggressive growth stocks, falling stocks to buy, current undervalued stocks, the best stocks for beginners, you name it.

For options trading specifically, though, the OptionsPro integration is a game changer. It helps you collect higher premiums without exposing yourself to additional downside. Whether you’re selling options or buying options, it’s a must-have for guiding every decision you make and ensuring risk management in options trading.

You can leverage candlestick pattern recognition and scanning to find high-probability opportunities, or you can take advantage of proprietary tools for assessing implied volatility in options to boost your odds of success. 

There is even a “sweet spot” calculator that helps you pick the perfect expiration date for earning the highest premiums before time decay starts to work against you. 

We encourage you to learn more about this stock trading system and what it can do for you, whether you’re selling covered calls or blue chip investing. Get a free stock analysis today!

Closing Thoughts on How to Sell Covered Calls

Hopefully, this guide on how to sell covered calls has left you feeling confident and clear in executing this strategy. It can be an excellent way to earn supplemental income when done correctly. 

Choose stocks with moderate volatility and high trading volume, configure the strike price and expiration date, monitor your position, and hope for the best! When you follow all our tips above (including using VectorVest), you’ll come out on top more often than not.

Want to learn options trading a bit more before getting started? Explore resources like open interest mean in options, warrants vs options, taxes on options trading, how to short a stock with options, trading futures vs options, how do options affect stock price, NQ stock options, when to exercise options, how to build a stock portfolio, and free stock analysis websites.

But at this point, it’s time you saw firsthand what a difference VectorVest can make in your arsenal, whether you’re searching for the best iPhone stock apps or the best Android stock apps. 

Why work harder when you can trade smarter, saving time and stress while earning higher returns along the way? Start your trial today and set yourself up for success selling covered calls.