Covered Call
A conservative income strategy: hold the underlying and sell a call to earn premium, with capped upside.
When to use
- You already own the stock/index exposure
- You are okay selling at the strike
- You want to earn premium in sideways markets
Info
Covered calls reduce upside, not downside. You can still lose if the underlying falls.
Practical deep‑dive
Info
Profile
Best suited for neutral or income/hedging objectives depending on structure.
Strategy snapshot (quick)
| Field | Value |
|---|---|
| Style | advanced |
| Cost type | Advanced structure; rules and margin treatment matter. |
| Best when | You understand payoff equivalences and execution frictions. |
| Watch out | Rule-dependent behavior (margin/settlement); avoid without deep understanding. |
Greeks to watch
Focus on these exposures first
| Greek | Why it matters |
|---|---|
| All | Treat as advanced: understand net Greeks and settlement |
| Margin | Broker/exchange rules matter |
| Liquidity | Execution frictions dominate edge |
Professional options traders focus on “structure first”: define risk, choose strikes/liquidity, and write down exit rules before entry. Most losses come from oversized positions and holding short-dated options without a plan.
Execution checklist
Use this before placing the trade
| Check | Why it matters | Quick test |
|---|---|---|
| Liquidity | Spreads can eat edge | Tight bid‑ask + decent volume/OI |
| Risk defined | Prevents blow-ups | Max loss is known and acceptable |
| Time horizon | Avoid time mismatch | Expiry matches your view timeframe |
| Volatility regime | Premium cost changes outcomes | IV not extreme vs recent range |
| Exit plan | Stops emotional decisions | Target/stop/time exit written down |
Mistakes to avoid
- Trading illiquid strikes (wide spreads) because premium looks “cheap”.
- Using market orders during fast moves and getting poor fills.
- Adding to losing positions without a predefined rule.
- Ignoring event risk (results, policy events) near expiry.
- Overusing weekly expiries before mastering risk control.
Summary (takeaways)
- Prefer defined-risk structures while learning.
- Liquidity and execution quality matter as much as strategy selection.
- Consistency comes from process, not predictions.