Covered Calls Explained: A Beginner’s Guide to Generating Extra Income from Stocks
Many investors want to earn more from their portfolios without taking on excessive risk. One of the most popular strategies for doing this is called a covered call. It’s a simple yet powerful way to generate income on shares you already own, while still keeping the potential for stock price growth.
In this article, we’ll break down what covered calls are, how they work, their pros and cons, and whether they might be right for you.
What Is a Covered Call?
A covered call is an options trading strategy where an investor sells a call option on a stock they already own.
“Covered” means you already hold the shares (so you’re covered if the option buyer wants to exercise).
“Call” is the option contract that gives the buyer the right — but not the obligation — to purchase your stock at a set price (the “strike price”) before a certain date.
In exchange for selling the call, you receive a premium (cash) upfront.
Example of a Covered Call
Imagine you own 100 shares of Company XYZ at €50 each.
You sell a call option with a strike price of €55 that expires in 1 month.
You collect €200 in premiums for selling the call.
Two scenarios can happen:
Stock stays below €55: You keep your 100 shares plus the €200 premium — extra income for doing nothing.
Stock rises above €55: The option buyer may exercise their right to buy at €55. You still keep the €200 premium, but you must sell your shares at €55 (even if the stock goes higher).
Want to see this in action? Check out this quick video where I explain a covered call step by step: How I Earn Weekly Income with Covered Calls | Step-by-Step Tutorial
Why Use Covered Calls?
Pros:
Extra income (from option premiums).
Works well in sideways or slightly bullish markets.
Lowers your effective cost basis (makes your shares cheaper).
Cons:
Caps your upside (if stock soars, you miss gains above strike price).
Requires owning at least 100 shares per option contract.
Still subject to stock price declines.
When Is the Strategy Useful?
Covered calls are often used by:
Long-term investors who want extra cash flow.
Retirees looking for steady income.
Traders who believe the stock will stay flat or rise only modestly.
Risks to Consider
Although covered calls are considered conservative, there are risks:
If the stock falls significantly, the premium you earned may not cover the loss.
If the stock rises sharply, you might regret being forced to sell at the strike price.
Final Thoughts
A covered call is like “renting out your stocks.” You earn income from the premiums while keeping ownership, but with the trade-off of limiting big gains. For many investors, especially those who value steady income, it can be a smart and relatively safe options strategy.
💡 Want to see how this works in practice? I’ve made a short video walking through a real covered call example with charts and simple explanations. You can watch it here: How I Earn Weekly Income with Covered Calls | Step-by-Step Tutorial
As always, do your own research and consider speaking with a financial advisor before trading options.