Covered call options are a great way to earn additional income from your stock portfolio. By selling stock options one can realistically earn 60% or more on your money a year. In order to learn the covered call strategy you have to become familiar with selling stock options.

Selling is called “writing” in the world of stock options.

I know, it would be so much simpler to just say selling, but as always, the financial community has to complicate things. So when you hear someone talk about writing covered calls they are just referring to someone selling a covered call. 

Before we discuss selling stock options, let me explain how covered calls work.

Selling Covered Call Options

A Call option gives its buyer the “right, but not the obligation”, to buy shares of a stock at a specified price (strike price) on or before a given date (expiration date).

Selling covered call options is a strategy that is best used when stock prices are trending in a channel or rising slightly. It’s similar to collecting rent on a piece of lease purchase property. For instance, suppose you were renting your home to someone and you let them “rent with the option to buy.”

The way these leases work is that the tenant pays $X a month for a set period of time and at the end of that time period they have the “option” or the “right” to buy the home.

If they choose not to buy the home then they lose out on all the rent money they paid you.

Covered call options work somewhat the same way. You will first buy shares of stock (buy the house) and then sell or write call options against the stock (rent your house out with an option to buy).

So if you own 100 shares of company XYZ, you would sell 1 call option to someone giving them the “right” to purchase your stock from you. In exchange for selling these rights, the buyer is going to pay you money.

This money is yours to keep no matter what happens in the future. If the option doesn’t get exercised, you keep your stock and the money you were paid for selling the option.