Covered Calls For Dummies (2024)

There is no book called Covered Calls For Dummies. But that's okay becuase you don't need one. Everything you need is right here in this tutorial. By the time you have finished reading this tutorial you will have a very good understanding of how covered calls work. It's so easy that dummies and non-dummies can do it equally well!

The two types of options (puts and calls) have a lot in common. Here are some basic parameters:

A single option contract controls 100 shares of stock.

But, options are quoted in the market on a per-share basis so when you see an option price quoted at $1.60 that means it's $160 per option contract (because each contract controls 100 shares).

See Also

Covered Calls: How They Work and How to Use Them in InvestingCovered Calls: A Step-by-Step Guide with ExamplesThe Basics of Covered CallsAn Alternative Covered Call Options Trading Strategy

If you owned 100 shares of stock, you could sell 1 call option against it and receive $160.

If you owned 400 shares of stock, you could sell 4 call options against it (not 400 call options) and receive 4 x $160, or $640.

And, if you own less than 100 shares of stock you can't create a covered call position from it.

Strike prices are usually available in $5 increments, or in $2.50 increments for lower priced stocks, or in $10 increments for high priced stocks. Some actively traded stocks have strikes in $1 increments. (You don't need to know all this; we'll show you all of the available choices in our tables.)

There are over 160,000 call options available with different combinations of month, stock, and strike price, but for some stocks, some months, and some strike prices, there aren't any options available. The CBOE decides which options are available. You will see "-" in our tables if an option is not available.

Another way to have covered calls for dummies explained (after you're done with this tutorial) is to read through our covered call blog.

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