Chapter 8: Step-by-Step Selling Covered Calls

Book: Understanding Options 2E

Type: Chapter 8

Difficulty: Beginner

Reading time: 12 min

Core idea

Selling the call is the easiest part — risk planning is the hard part

Brokerage firms have invested heavily in making the actual click-and-confirm flow for selling a covered call painless. The harder skill is mentally rehearsing what can go wrong before the order goes in. Even a conservative strategy like covered calls can lose money — your underlying stock can drop sharply, your upside can be capped at a frustrating moment, or you can mis-enter the order and accidentally take on uncovered risk.

The order screen has four pivotal fields: action (Sell to Open), quantity in contracts (not shares), order type (limit, almost always), and a clearly chosen expiration and strike. Get those four right and you have placed a covered call.

The four order-entry transaction types

Every options screen exposes the same four actions, and confusing them is the most common rookie mistake.

• Buy to Open — open a new long position by buying a call or put.
• Sell to Close — exit a long option position you previously bought.
• Sell to Open — open a new short position by selling a call or put (the action used for covered calls).
• Buy to Close — exit a short option position you previously sold (used when buying back a covered call early).

Why it matters

A wrong click can convert a covered call into a naked call

If your account holds shares of Stock A and you accidentally select Stock B in the symbol field, the call you sell is uncovered — a vastly riskier position with theoretically unlimited loss. Most brokers will block the trade because it requires a higher options approval level, but not all. Double-check the underlying ticker before submitting.

Likewise, typing 100 in the quantity field when you meant 1 attempts to sell 100 contracts — control of 10,000 shares. If you happen to own that many, the trade goes through and you have just leveraged your account dramatically. Read every field twice.

Plan worst-case before you press enter

Three risks deserve named attention. Heart-stopping plunges — the underlying stock drops 10 percent or more on bad news, and the premium is a small consolation. Lost opportunities — the stock rockets past the strike and the upside above the strike goes to the buyer. Unrealistic expectations — beginners imagine recurring premium income as a low-effort annuity, when in fact good setups require patience. Acknowledge all three before opening the position.

Key takeaways

Key takeaways

• Use Sell to Open to initiate a covered call — it tells the system you are opening a new short position.
• Quantity is in contracts, not shares; one contract represents 100 shares of the underlying.
• Always use a limit order on options — market orders can fill at terrible prices because bid-ask spreads are wider than in stocks.
• The bid price is what you collect as a seller; the ask is what a buyer pays.
• Plan for the three main risks: a sharp stock drop, lost upside past the strike, and unrealistic income expectations.
• Start with a single contract while you learn — small dollar exposure while you build judgment.

Mental model

click to zoom

The covered call order flow from chain to fill

Read it as: Each step on the order screen feeds the next. The decision point is the preview screen — never skip it, and never override a sanity check from the broker about position size or coverage.

Practical application

1. Confirm you own at least 100 shares per contract — Check the position page before you ever touch the option chain.
2. Pull the option chain for the underlying — Type the ticker into your broker’s options search.
3. Locate the row for your chosen strike and expiration — Note the current bid (your sell price) and the bid-ask spread.
4. Select Sell to Open — This is the only action that opens a new short call position.
5. Enter 1 in the quantity field — One contract covers your 100 shares. Re-read the number before continuing.
6. Set order type to Limit — Enter a limit price at the current bid (or slightly above if you can afford to wait for a better fill).
7. Preview the order — Confirm the underlying, action, contract count, strike, expiration, and net credit on the preview screen.
8. Submit and watch for the fill — Premium typically appears in your account as a credit by the next business day.

Never use market orders for options

Options have wider bid-ask spreads than stocks, especially on less popular strikes. A market order can fill at a noticeably worse price than the displayed bid. Always use limit orders, even if it occasionally means your order does not fill at all.

Example

A first covered call on a dividend stock you already own

Suppose you own 100 shares of Riverford Beverage, currently at $35. You decide to sell a one-month $36 call. You open the option chain, find the row for next month’s $36 strike, and see a bid of $0.65 and an ask of $0.75.

You click “Trade,” choose Sell to Open, enter 1 in the quantity field, set the order type to Limit, and enter $0.70 as the limit price — splitting the spread to improve your fill chance. You hit preview, confirm that the symbol is RBEV (not a similarly named ticker), confirm the strike is $36 and the expiration is the correct third Friday, then submit. Twenty minutes later the order fills at $0.70. The next business day, $70 of premium appears in your account labeled as a credit. You have completed your first covered call. Now you wait for one of three outcomes — which the next chapter walks through.

Related lessons

Related

Chapter 7: How to Choose the Right Covered Call Picks the call this chapter teaches you how to enter. Chapter 9: Managing Your Covered Call Position Covers what to do after the order fills, including rolls and buy-backs. Book Overview: Understanding Options 2E Beginner-friendly tour of options from terminology through strategy.