Selling Covered Calls: What Are The Pros? What Are The Cons?

Options trading. You’ve probably heard about this in the past year or so, it’s become incredibly popular thanks to apps like Robinhood. While there are a lot of different strategies out there, today’s article discusses covered calls. Namely, what these are; how they work; and whether or not they’re worth doing.

I’ll also walk you through a real-life situation, showing you the power (and pitfalls) of selling covered calls.

What Is A Covered Call?

Covered calls are options contracts where you (the seller) collateralize 100 shares of a particular company, promising to sell these shares if they reach (or exceed) a certain price on a specific day.

In exchange, you are paid a premium. You get to keep this premium no matter what, and if your stock never reaches the agreed upon price (called the strike price) by the set day, your option expires worthless. This means that you get to keep your 100 shares and the premium.

You can also buy your calls back at any point between the time you sell them and their expiration date.

Options prices fluctuate too, giving you a chance to buy back contracts for a profit.