How to Sell Covered Calls — Step by Step

Why Covered Calls?

Covered calls are the most popular income strategy in options trading. You own 100 shares and sell a call option against them. You collect premium every month and lower your cost basis over time. If the stock stays flat or goes up a little, you keep the premium. If it goes up a lot, your shares get called away at a profit.

This guide walks you through the exact steps to start selling covered calls today.

Step 1: Pick the Right Stock

Not every stock is good for covered calls. You want:

Stocks you want to own long-term. If the stock drops, you are holding it. Make sure you believe in the company.
Moderate volatility. Too volatile and the stock swings through your strike. Too boring and the premiums are tiny. Look for IV rank between 20-50.
Liquid options. Check that the bid-ask spreads on the options are tight. Popular stocks like AAPL, MSFT, AMD, SPY, and QQQ have great option liquidity.
Stocks without imminent catalysts. Avoid selling calls right before earnings if you do not want to get called away on a big move.

Step 2: Own 100 Shares

You need exactly 100 shares per covered call contract. If you own 300 shares, you can sell up to 3 covered calls. Partial lots do not work — you must have full 100-share blocks.

If you do not own shares yet, buy them first. Some traders like to sell a cash-secured put to enter the position at a discount and then transition to covered calls once assigned.

Step 3: Choose Your Strike Price

The strike price determines your cap on gains and how much premium you collect:

Far OTM (5-10% above current price): Lower premium but more room for the stock to run. Good if you are bullish and want to keep your shares.
Near OTM (2-5% above current price): Higher premium but more likely to get called away. Good if you are neutral and focused on income.
ATM (at current price): Maximum premium but very high chance of assignment. Only use if you are comfortable selling your shares now.

A common starting point is a strike 5% above the current price with 30-40 delta.

Step 4: Select Your Expiration

The 30-45 day range is the sweet spot for covered calls. Here is why:

Time decay accelerates. Options lose value fastest in the last 30-45 days. You are selling that decay.
Enough premium to be worthwhile. Weekly options pay very little unless the stock is volatile.
Flexibility. Monthly cycles let you adjust your strategy each month based on market conditions.

Avoid going too far out (90+ days) unless you are fine with locking up your position for a long time.

Step 5: Place the Trade

In your brokerage platform:

Navigate to the option chain for your stock
Select the expiration date (30-45 days out)
Find your chosen strike price in the calls column
Click "Sell to Open" on that call
Set the order type to "Limit" and use the mid-price between the bid and ask
Set quantity to match your shares (1 contract per 100 shares)
Submit the order

You will see the premium credited to your account once the order fills.

Step 6: Manage the Trade

After you sell the call, monitor these scenarios:

Stock stays below the strike (ideal). Let the call expire worthless or buy it back for 80-90% profit early. Then sell a new call next month.
Stock approaches the strike. Decide if you are okay with assignment. If not, "roll" the call — buy back the current call and sell a new one at a higher strike and/or later expiration.
Stock drops significantly. The call expires worthless (good), but your shares lost value. Sell a new call at a lower strike if needed, but never sell below your cost basis.

Step 7: Repeat Monthly

The power of covered calls is in consistency. Selling one call per month on a $100 stock might generate $150-$300 per month. Over a year, that is $1,800-$3,600 in premium income — an 18-36% boost to your returns on a $10,000 position.

Common Mistakes to Avoid

Selling calls too close to the money just for premium — you get called away constantly
Selling through earnings without realizing the risk of a big gap up
Panicking when the stock goes above your strike — getting called away at a profit is a win
Not having a rolling plan when the stock approaches your strike

Summary

Covered calls are straightforward: own shares, sell calls, collect premium, repeat. Start with stocks you know, strikes 5% OTM, and 30-45 day expirations. Manage at 50% profit or roll when needed. Over time, the accumulated premium meaningfully reduces your cost basis and enhances returns.