Definition
A strategy in which an investor who owns shares sells another party the right to buy those shares at a set price, collecting a cash premium in exchange for capping potential upside.
A covered call pairs two positions: existing share ownership (the "cover") and a short call option — a contract giving a buyer the right to purchase those shares at a predetermined price, called the strike price, before a specified expiration date. The seller collects an upfront premium regardless of what happens next. If the stock stays below the strike price, the option expires worthless and the seller keeps both the shares and the premium. If the stock rises above the strike, the shares may be "called away" — sold at the strike — and the seller forgoes any gains above that level.
For families holding concentrated stock positions, covered calls are sometimes evaluated as a way to generate ongoing income from shares that might otherwise sit idle. Illustratively, a founder holding a large block of stock trading near $80 might sell calls with a $90 strike, collecting a modest premium while accepting that the position could be liquidated at $90 if the stock rallies.
A common confusion is treating covered calls as purely "free money." The premium is real, but it represents a genuine trade-off: meaningful upside is surrendered. Tax consequences also arise each time options are exercised or expire, and a qualified tax professional should evaluate those outcomes for any specific family's situation. Covered calls are one tool sometimes discussed alongside hedging and collars and exchange funds.
Last reviewed August 25, 2026 · Editorial Policy
