How to Trade Covered Calls for Monthly Income
Generate consistent monthly income by selling covered calls against stocks you already own—a conservative options strategy for building cash flow.
What a Covered Call Is (Quick Refresher)
A covered call is a conservative options strategy where you sell call options against stock you already own. You earn premium upfront and can potentially repeat this monthly—at the cost of capping upside above your call strike.
Key Components:
- Own 100+ shares (per contract) of the underlying stock
- Sell call options above current price to collect premium
- Keep premium regardless of outcome
When Covered Calls Make Sense
Ideal Conditions:
- You own 100+ shares (per contract)
- Neutral to slightly bullish view
- Comfortable selling shares at strike price
- High implied volatility (better premiums)
Best Market Conditions:
- • Sideways or mildly uptrending markets
- • High volatility periods (better premiums)
- • Before earnings announcements (IV expansion)
- • When you want income vs. growth
Step-by-Step: Placing a Covered Call
Pick a Stock You Own
Must own 100 shares per contract. Choose liquid stocks with active options markets.
Look for stocks with tight bid-ask spreads and high option volume.
Choose Expiration (~30-45 days)
Target 30-45 days to expiration (DTE) for optimal theta decay balance.
Shorter = faster decay but more management; Longer = less decay but steadier.
Select Strike Using Delta
Use delta ~0.20-0.35 to balance income vs assignment risk.
Higher delta = more premium but higher assignment probability.
Place Sell-to-Open Order
Submit covered call order and collect premium immediately.
Use limit orders slightly below mid-price for better fills.
Example Trade (Numbers)
Real Example: AAPL Covered Call
Setup:
- • Own 100 shares at $48.00
- • Sell 1 call, 30 DTE, $52 strike
- • Collect $0.90 premium ($90 total)
- • Delta: ~0.30 (30% assignment probability)
Outcomes:
- • Max income (not assigned): $90
- • If assigned at $52: $4/share stock gain + $90 premium = $490 total
- • Break-even: Stock can drop to $47.10 before losses
Return calculation: $90 premium on $4,800 position = 1.875% return in 30 days (22.5% annualized)
Frequently Asked Questions
Can I do covered calls on ETFs?
Yes, if options are listed and liquid. Popular ETF covered call targets include SPY, QQQ, and sector ETFs with high volume.
What if my shares drop in value?
The premium you collected offsets losses slightly, but doesn't provide full protection. Covered calls are income strategies, not hedging strategies.
Are weekly options better than monthly?
Weekly options decay faster but require more active management. Monthly options provide better premium-to-time ratios for most investors.
What delta should I target?
For income strategies, many traders target 0.20-0.35 delta to balance premium collection with assignment risk.
Ready to Start Generating Monthly Income?
Start with one covered call position, track your results in a trading journal, and scale only after 3-5 successful cycles.