A covered call generates income from shares you already own by selling someone else the right to buy them at a higher price.
What Is a Covered Call?
You own 100 shares of a stock. You sell one call option against those shares at a strike above the current price. You collect a premium. If the stock stays below the strike, you keep the premium and the shares. If it rises above the strike, you sell the shares at the strike — and still keep the premium.
How Income Is Generated
The premium is yours the moment you sell the call. It is yours whether the call expires worthless or is exercised. That premium lowers your effective cost basis and accelerates your returns on shares you intended to hold anyway.
The Trade-Off
In exchange for the premium, you cap your upside at the strike price. If the stock rockets, your gain is limited to the strike plus the premium. WSP selects strikes that balance income against a realistic exit price.
Key Takeaways
- Covered calls require owning 100 shares per contract.
- Premium lowers your cost basis and adds income.
- Upside is capped at the strike — choose strikes wisely.