By Harry Prabandham · Updated September 28, 2026
Investing & Markets
Covered Calls: How They Work, Trade-offs and Taxes
A covered call sells a call option on shares you own: you collect a premium but give up gains above the strike and keep nearly all the downside.
Covered Calls: How They Work, Trade-offs and Taxes
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What is a covered call?
- You own at least 100 shares per contract and sell a call option giving the buyer the right to buy them at the strike price until expiration.
- You receive the option premium up front, whatever happens next.
- If the stock is at or below the strike at expiration, the option usually expires unexercised and you keep the shares.
- If it is above the strike, your shares may be called away; U.S. equity options can be assigned early, especially before an ex-dividend date.
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Full Guide
What is a covered call?
- You own at least 100 shares per contract and sell a call option giving the buyer the right to buy them at the strike price until expiration.
- You receive the option premium up front, whatever happens next.
- If the stock is at or below the strike at expiration, the option usually expires unexercised and you keep the shares.
- If it is above the strike, your shares may be called away; U.S. equity options can be assigned early, especially before an ex-dividend date.
What do you give up for the premium?
- Your upside is capped at the strike price plus the premium received.
- The premium offsets only a small part of a decline, so you keep nearly all of the stock's downside risk.
- Assignment can force a sale at an inconvenient time, including realizing a taxable gain.
- Commissions and bid-ask spreads reduce the net premium.
Choosing strike and expiration
- Out-of-the-money strikes leave more room for gains but pay less premium; at-the-money strikes pay more but cap gains sooner.
- Shorter expirations mean more frequent decisions and trading costs; longer ones commit the shares for longer.
- Premiums are larger when implied volatility is high, reflecting larger expected price moves.
- Rolling, buying back the call and selling a new one, can extend the position but may realize a loss on the option.
How are covered calls taxed?
- If the call expires, the premium is a short-term capital gain; if it is assigned, the premium is added to the stock's sale proceeds.
- Qualified covered calls must be exchange-traded, written more than 30 days before expiration, and not deep in the money.
- Calls that don't qualify can trigger straddle rules that defer losses and affect the stock's holding period.
- For an in-the-money qualified covered call, the stock's holding period stops running while the call is open; confirm treatment with a CPA.
When are covered calls used with a concentrated stock position?
- Some holders of a large single-stock position write calls for income on shares they still hold while they reduce the position over time.
- Choosing strikes at prices where you would be willing to sell can line up assignment with a diversification plan.
- Many companies restrict or prohibit employees from trading options on company stock, so check your insider trading policy first.
- Rubric uses options only where suitable and only strategies described in its Form ADV: writing covered calls, spreads, and uncovered options (uncovered writing carries potentially unlimited loss), and buying options, including protective puts and collars, to hedge existing positions (a hedge costs premium or caps gains, reduces but does not eliminate losses, and ends at expiration).
Key takeaways
- A covered call trades away upside above the strike in exchange for premium income.
- Nearly all of the stock's downside risk remains.
- Premium is generally a short-term gain, and qualified covered call rules affect holding periods.
- Options involve risk and are not suitable for all investors; brokers must deliver the options disclosure document before trading.
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