Covered Calls are the Trading Cheat Code | How to Trade Covered Calls

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In this one, we go into detail on how you trade covered calls, why you might want to trade covered calls, and what the risks and benefits are of trading covered calls. Finally, we do an actual trade on Think or Swim which is TDAmeritrade's trading platform.

Covered calls are great for a large swathe of investors. They allow you to to create an income stream as well has hedge against a market downturn. When you sell, or write, a covered call against 100 shares, the premium you receive as a credit is yours to keep. As long as you don't buy-to-close the call, that cash is yours. If the call expires out of the money, you keep your shares but at a reduced cost-basis. If it expires in the money, you get assigned. This means you must sell those 100 shares at the strike price. If the strike price is higher than the average cost of the shares, then you make a profit. You also get to keep the credit. You don't lose the credit as long as you don't buy-to-close.

The further out of the money the call is, the less premium you will receive. However, you will be less likely to be assigned as the probability of the call becoming in the money is less. The closer to at the money it is, the more premium you will receive but the more likely it is to become in the money and for you to be assigned. Regardless of what happens, you should be sure you are comfortable holding the shares for the long-term and selling them at the strike price. Both are real possibilities. The alternative is buying-to-close the call at some point. This is fine if you want to roll the call out to a further expiration for a credit, but isn't advised if it's going to incur a loss.

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