ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Personal Finance»
  • Investing in Stocks, Bonds, Real Estate, More

Writing Covered Call Options

Updated on November 29, 2011

There are many different strategies when it comes to trading options. Some strategies are very risky, while others can actually help lower overall risk. Writing covered calls is one of those strategies that can help give your portfolio some downward protection.


When someone writes call options, they can either write them “naked” or “covered.” Writing naked calls means that the writer does not own the underlying stock for the options he is writing. Therefore, if the options are exercised, the writer will have to go into the open market, purchase the shares of the underlying stock, and subsequently sell them for the strike price. As you can see, writing naked call options is extremely risky and has an unlimited amount of potential loss.

On the other hand, writing covered calls means that the writer owns enough shares of the underlying stock to “cover” his call options should they be exercised. Therefore, if the options are exercised, the writer can simply sell the shares of the underlying stock that he already owns, for the strike price. With covered calls, the amount of potential loss is limited.

Limiting Downside Risk with Covered Calls

By writing covered calls, you can generate revenue from your stocks and place some padding to protect against downward moving stock prices. Let’s go over a real life example from my own portfolio. First, take a look at the underlying stock, which is Altria Group Inc. (MO):

After purchasing the shares, I wrote 3 contracts worth of call options on Altria to place some padding on my 300 shares of the company:

Take a look at the following figures:

By writing the covered call, I placed a 4.492% padding on my investment in Altria over the life of the call option. Therefore, the stock price has to drop 4.492% before I even begin to lose value in my investment.

Also, if the stock price increases beyond $30.00, before the expiration date, I still earn a profit of $1,392.84, which is a 17.5% return on my investment. Also, since I own the underlying stock, I receive the dividends of the company as well, which is currently $1.64 per share, per year, for Altria.

Downside to Writing Covered Calls

As with anything in life, there are some downsides to writing covered calls:

  • Until the call option expires, or you buy back your call options (for the current market price of the options), you cannot sell your underlying stock.
  • You limit the upside of your investment, because you are bound to sell your underlying stock at the strike price, if the option is exercised. Therefore, even if the stock price of Altria increased to $50.00, I would still have to sell my shares for $30.00.

While the second downside may seem discouraging, you can buy call options to mitigate this risk of possibly losing out on a huge increase in the underlying stock price. For example, I could buy call options for Altria with a strike price of $35.00 and the same expiration date of January 19, 2013. While I would decrease my padding a little, (by the total cost of the call options) I would keep the possibility of benefiting from a large increase in Altria’s stock price.


Writing covered calls is a great way to reduce risk and generate additional revenue from your stocks. There are many different ways to select strike prices and expiration dates for the covered calls you write. However, as long as the strike price you select is higher than the price for which you bought the underlying stock, you will not have a capital loss if the options are exercised.


    0 of 8192 characters used
    Post Comment

    • profile image

      fannilang24 6 years ago

      Thanks for the advice. I'm currently researching about covered calls because I would like to start trading with CompundStockEarnings ( and I don't know much about covered calls. Can a monthly 3-6% gain be achieved with this?


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: ""

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized. (Privacy Policy)
    CloudflareThis is used to quickly and efficiently deliver files such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisements has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)