It’s surely happened to you: you hold some long-term shares, you like the company, you want to keep it, but for days, weeks or even months the price stays stuck in a range and it feels like your money is just “sitting still” in the account. The covered call lets you turn that waiting into real income, without selling your shares or giving up your position.
What exactly is a covered call?
The structure is very simple: you hold 100 shares of a stock (a long position that already exists) and you sell 1 OTM call (out of the money) on those same shares. The shares you already own are the “cover” for that sold call.
From the moment you sell the call, you collect a premium that is your immediate income and you set a temporary ceiling: if the price rises above the strike, you’ll probably be assigned and you’ll sell your shares at that level. Your position stops being “I hold 100 shares and I wait” and becomes: I hold 100 shares plus a stream of premiums while the price moves within a reasonable range.
An example with numbers: 100 shares of Nike
Imagine you hold 100 shares of Nike and the price is around $65. You think the company is fine, you want to keep it, but you don’t expect an explosive rally in the short term.
- Current position: +100 shares of Nike at $65
- You sell 1 call at 70 expiring in 30-45 days
- You collect a premium of $1.40 per share = $140 credit
- Your effective cost drops from $65 to $63.60 (65 − 1.40)
Scenario 1: Nike rises above $70
If Nike is above $70 at expiration, you’ll normally be assigned. You sell your 100 shares at $70 and keep the $140 premium. Total profit: gain on the shares ($500) plus premium collected ($140) = $640 before commissions. The catch is clear: if Nike shoots much higher, you’re “only” left with those $640. The covered call caps your maximum profit.
Scenario 2: Nike stays sideways ($63-69)
The call expires out of the money. You keep your 100 shares and pocket the full $140 premium. The covered call has done exactly what you want in a sideways market: it turns the “boredom” into income.
Scenario 3: Nike drops sharply to $60
The $140 premium cushions part of the fall, but doesn’t erase it. Your loss isn’t $5 per share, but 5 − 1.40 = $3.60 per share. The covered call protects a bit in moderate drops, but in a big fall the effect of the premium is limited.
How I pick strike and expiration in practice
There are two key decisions. For the expiration, a typical range is usually between 30 and 45 days: it gives the strategy time to work without leaving you trapped forever. For the strike, I look for a level above the current price that makes sense on the chart.
How to build the covered call in ProRealTime v13
On a platform like ProRealTime v13 the flow is quite natural:
- Open the underlying’s chart (Nike, SPY, QQQ…) and mark your resistance zone
- Go to the options chain for the expiration you’re interested in (30-45 days)
- Look for an OTM call with delta around 0.20-0.30 and good volume/open interest
- Simulate the position in the strategy analyzer: check maximum profit, breakeven and scenarios
Which stocks make the most sense?
The strategy works best on underlyings with plenty of liquidity in both shares and options, with reasonable spreads between bid and ask, and that don’t move erratically on any piece of news. Typical examples: large ETFs like SPY or QQQ and large caps on the NYSE or Nasdaq. The opposite: very small stocks with little options liquidity where the spreads eat half your premium just to get in and out.
Practical management: do I let it run to expiration or roll it?
- Price far from the strike and little time left → let it expire and sell another one next month
- Price rising fast toward your strike → consider rolling: buy back the sold call and sell another with a higher strike and/or a further-out expiration
- Stock falls sharply and the premium deflates → buy back the call very cheaply and wait for the price to stabilize before selling a new one
Checklist before selling a covered call
Do you really want to keep those shares in your portfolio, or are you using the covered call as an excuse not to sell?
Do you have at least 100 shares (or multiples) of the underlying?
Have you chosen a reasonable expiration (30-45 days)?
Does the strike make technical sense and have a reasonable delta (0.20-0.30)?
Do the underlying and its options have enough liquidity?
Do you know what you’ll do if the price shoots up, stays sideways or falls sharply?
Conclusion
The covered call is a very direct way to collect premiums on shares you already hold. It won’t turn a bad stock into a good one, nor does it eliminate the risk of big drops, but it does improve the profile of many positions that would otherwise just be “asleep”. In exchange, you accept a temporary profit ceiling and the possibility of missing part of a very strong rally. If you understand that trade-off well and apply it with clear criteria for expiration, strike and liquidity, the covered call can become a very solid piece in your options toolbox.
