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★ How to Sell Covered Calls – Options Trading Explained
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What Is a Covered Call?
A covered call refers to a financial transaction in which the investor selling call options owns an equivalent amount of the underlying security. To execute this an investor holding a long position in an asset then writes (sells) call options on that same asset to generate an income stream. The investor’s long position in the asset is the “cover” because it means the seller can deliver the shares if the buyer of the call option chooses to exercise. If the investor simultaneously buys stock and writes call options against that stock position, it is known as a “buy-write” transaction.
Understanding Covered Calls
Covered calls are a neutral strategy, meaning the investor only expects a minor increase or decrease in the underlying stock price for the life of the written call option. This strategy is often employed when an investor has a short-term neutral view on the asset and for this reason holds the asset long and simultaneously has a short position via the option to generate income from the option premium.
Simply put, if an investor intends to hold the underlying stock for a long time but does not expect an appreciable price increase in the near term then they can generate income (premiums) for their account while they wait out the lull.
A covered call serves as a short-term hedge on a long stock position and allows investors to earn income via the premium received for writing the option. However, the investor forfeits stock gains if the price moves above the option’s strike price. They are also obligated to provide 100 shares at the strike price (for each contract written) if the buyer chooses to exercise the option.
A covered call strategy is not useful for a very bullish nor a very bearish investor. If an investor is very bullish, they are typically better off not writing the option and just holding the stock. The option caps the profit on the stock, which could reduce the overall profit of the trade if the stock price spikes. Similarly, if an investor is very bearish, they may be better off simply selling the stock, since the premium received for writing a call option will do little to offset the loss on the stock if the stock plummets.
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thank you for this! It was the specific video I needed!! Will start selling cover calls as soon as I reach 100 shares!
I did not truly understand covered calls and how to do them on Fidelity until I watched this. Thanks so much for spending the time to put this together.
never got to the part where you BUY TO CLOSE, and lost out. Tough lesson, but a lesson nonetheless. Thanks!
10/10 explanation. Appreciate it!
At 8:55 you mixed up the breakeven for buying vs selling call options. For selling call options calculating breakeven is calculated by taking (average cost – premium) what you stated was for buying call options.
For the case of this video, your actual breakeven would be (39.01 avg cost – 0.74) = a cool 38.27 a share, NOT 40.74.
Otherwise cool vid.
Dear god… RobinHood is so much easier. I work for a company that gives me stock so I’m still gonna use fidelity, but for fuck sake be more user friendly. Thanks for the vid!
should my strike price be higher than my cost basis?
Can you please explain in the writing process what the difference is between the selection of trade type: margin or cash?
@jake- great video .when your shared called away. Does fidelity sell it automatically or you need to login and click some buttons?
Thanks for the informative video, Jake! Love Fidelity overall, but man, their UI is a mess (imho); really appreciating your walkthrough here!
Great video. Very informative. So as long as I have over 100 shares of the stock I'm selling the call for if it gets exercised they will just take my shares? And the area that says risk is unlimited would be false as long as I still hold the shares?
Jake – you are awesome man. I love watching your content and it is so informative.
Can a person just let their covered calls expire instead of executing a 'buy-to-open' to cancel?
Exactly what I was looking for. Thank you!
Hello, do you the premium up front with Fidelity ? I know with RH you do and since I’m new to Fidelity I thought I would ask! Thanks and great video!
What does it mean, Max Loss: Unlimited?
And what happens if my order was never brought, do I have to pay the strike call, premium & fees by “Sell to Close” or do nothing?
What does being "called away" means? What happens to my shares?
Do you have a video on writing covered calls options on indexes? It is safer to write covered calls options on indexes than individual stocks
I made a recent mistake and sold a call with a strike "below" the share price by about a $4 difference, oops. Expiration is about 46 days out. So now I'm trying to buy to close near what I sold the call for. But there's like plenty of time. Looks like I'll take a reasonably small loss to fix the trade. Wouldn't it be logical to think that if the share price decreases in the meantime then won't I be able to recover most all of what I sold it for when I buy it back? Thx for your video.
Thanks that so easy to understand. I currently training with a UDEMY options training. and its so dam complicated it makes me not want to finish the training. Your video was simple and to the point.. I appreciate it…
Liked & subscribed. you explained it well !
Hey jake you are doing awesome job
Thank you, Jake…exactly what I was looking for.
MAN OH MAN!!! the video i been looking for! thank you for this!
Hi Jake, Thanks for the video, I received an assignment to buy 100 shares of Paypal. However, I am not sure why it is on the Margin account instead of using my more than available cash account. Any thoughts on this? I also see your BAC is on margin account. Regards, B
Great info. So a good strategy would be to always buy 100 shares of stock you like at a time and immediately sell covered calls at a higher strike price.
Thank you! Definitely considering your SPY covered call strategy.
I don’t understand
Selling my first covered call. Your back catalog is an awesome resource.
Very helpful !! Thank you !!
Do you usually let your covered call expired or do you close it early?
Thank you
Thank you so much for your videos! 🙂
This was an excellent video. Thank you very much.