A covered call is a contract you sell that gives someone else the right to buy 100 shares of a stock you already own, at a specific price, before a specific date. In exchange, they pay you cash up front — called the premium. That premium is yours to keep regardless of what happens next.
"Covered" means your existing shares back the obligation. You own the stock; the contract is covered by it. This is different from a naked call, which is sold without owning the underlying shares and carries substantially different risk.
The mechanics
When you sell a covered call, you set two things:
- A strike price — the price at which your shares could be sold. Set above the current stock price; the buyer only profits if the stock rises meaningfully.
- An expiration date — the date the contract ends, typically a few weeks out.
You collect the premium immediately when the trade fills.
At expiration, one of two things happens:
The stock stays below the strike price. The contract expires worthless. You keep your shares and the full premium. You can sell another covered call the next cycle.
The stock rises above the strike price. Your shares may be "called away" — sold automatically at the strike price. You keep the premium and the proceeds from selling your shares at the strike. What you gave up is any gain the stock made above the strike.
Both outcomes are predefined. Nothing about assignment is unexpected if you understood the contract when you sold it.
Why this generates income
Selling covered calls consistently across a portfolio generates a recurring stream of premium income — not from dividends, not from selling stocks, but from the contracts themselves. The premium is collected upfront, every cycle, regardless of which outcome occurs. Done on a portfolio of stocks you intend to hold long-term, this income adds up alongside the portfolio you hold.
The tradeoffs
Covered calls are among the more conservative options strategies. That doesn't mean risk-free.
Upside is capped at the strike. If the stock climbs past the strike, your shares are called away at the strike price — you don't participate in gains above it. You accepted the premium in exchange for that cap.
Shares can be called away. Assignment is a normal, defined outcome — not a loss. But for positions with specific tax, holding-period, or concentration considerations, assignment may be unwelcome even when financially profitable.
The premium doesn't protect against a stock decline. If the stock falls sharply, you still own it and still bear that loss. The premium reduces the loss by the amount collected; it doesn't eliminate downside exposure.
How Income Factory applies this
Income Factory's engine analyzes your holdings and surfaces covered call examples — which strike to consider, which expiration, and whether a trade meets its quality bar for the week. Every trade is reviewed by you and placed at your own broker. The engine never accesses your brokerage account.
Strike selection is based on the assignment probability (delta) implied by options market pricing, calibrated to the strategy level you've chosen. See Methodology and data sources for how the engine picks strikes and expirations.
Common follow-up questions
Do I need to own exactly 100 shares?
One contract covers exactly 100 shares. You can sell one contract per 100 shares you own. 250 shares → up to 2 contracts; 50 shares → no contracts.
What if I want to close the position before expiration?
You buy back the contract (buy to close) at the current market price, which is typically less than what you collected. You keep the difference. Your obligation ends; your shares are free.
Is this the same as a "buy-write"?
A buy-write is buying stock and simultaneously selling a covered call against it. The covered-call mechanics are identical; the difference is timing — you already own the shares rather than buying them in the same transaction.
This is educational content, not investment advice. Covered calls involve risk of assignment and loss of upside appreciation.