Covered calls for beginners
If you already own shares, a covered call is usually the first options trade brokers approve. Here is how to place one properly, and the mistakes that quietly cost new writers more than they collect.
New to the concept entirely? Start with what is a covered call.
Your first trade, step by step
- Step 1
Own 100 shares of something you actually want to hold
The strategy starts with the stock, not the option. If you would not hold the shares through a 20% drawdown, no premium makes it a good trade. Stable large caps and broad ETFs are where most beginners start.
- Step 2
Decide the price you would happily sell at
That price is your strike. Setting it above your cost basis guarantees the assignment outcome is a profit. Setting it too close to the current price means more premium but frequent assignment.
- Step 3
Pick an expiry, usually 30 to 45 days out
Options lose value fastest in the final weeks, which favours the seller. Monthly expiries also have the deepest liquidity and tightest spreads.
- Step 4
Check the option chain for liquidity
Look for reasonable open interest and a tight bid-ask spread. A wide spread quietly eats a large share of your premium on both entry and exit.
- Step 5
Place a sell-to-open limit order
Never use a market order on options. Start at or near the mid-price and adjust. Confirm the order is 'covered' and not naked before submitting.
- Step 6
Record the trade the day you place it
Strike, premium, expiry, contracts, date. Reconstructing this months later from a broker statement, after a roll or two, is painful and error-prone.
- Step 7
Manage to expiry
Three outcomes: it expires worthless and you write again, it goes in the money and the shares are called away, or you roll it out before expiry. Decide in advance which you want.
Beginner mistakes to avoid
- Writing a strike below your cost basis for a fatter premium
- Writing through an earnings date without accounting for gap risk
- Chasing the highest premium on the chain — high premium means high implied volatility for a reason
- Selling calls on a stock you were never willing to part with
- Ignoring dividends and getting assigned early just before the ex-date
- Using market orders on illiquid contracts
- Keeping no record, then having no idea whether the strategy is beating buy-and-hold
How to judge whether it is working
The benchmark is not zero — it is what you would have made simply holding the shares. Over a strong rally, covered calls will lag. Over a flat or choppy market, they should comfortably beat it. You only find out which is happening if you record every premium, every roll, and every assignment, and compare realised return against the unhedged holding.
Three or four positions is manageable in a spreadsheet. Once you start rolling, the arithmetic gets fiddly fast — see how to track covered calls.