WHAT IS A COVERED CALL?
- KidVestors
- Dec 27, 2025
- 5 min read
Updated: 22 hours ago
What you'll learn:
If you’ve ever dipped your toe into the world of investing, you know the stock market has a funny way of making simple ideas sound complicated. One minute you’re feeling good about buying your first share, and the next someone casually drops the phrase “covered call” like it’s no big deal. Suddenly, you’re Googling things like “What even is an options contract?” while questioning all your life decisions.
Don’t worry. We’ve got you.
Covered calls are one of the friendliest options strategies out there. In fact, many long-term investors use them to generate extra income from stocks they already own. No jargon. No Wall Street wizardry. Just a smart little way to earn more while holding on to a company you believe in.
So, What Is A Covered Call?
A covered call is a strategy where an investor sells a call option on a stock they already own. The word “covered” means you’re not making promises you can’t keep. Since you already own the shares, you’re covered if the buyer decides to use the option.
When you sell that call option, you get paid a fee called a premium. Think of the premium like getting paid for making a deal: “If this stock goes above a certain price by a certain date, I agree to sell it to you.”
Most investors use covered calls to earn extra income while still holding a stock they like. It’s not glamorous, but it’s practical, steady, and surprisingly beginner-friendly.
How Does A Covered Call Work?
Alright, imagine three moving parts. Nothing scary. Just three:
1. You own the stock.
Most brokers require you to own at least 100 shares to sell a standard call contract. That’s because one options contract equals 100 shares.
2. You sell a call option at a “strike price.”
The strike price is the price you agree to sell your shares for if the buyer decides to exercise the option.
3. You earn a premium upfront.
This is your income. Whether the buyer uses the option or not, you keep that money.
What happens next depends on the stock price.
What Happens If The Stock Price Stays Below The Strike Price?
Good news for you. If the stock price stays below the strike price by the expiration date, the buyer has no reason to exercise the option. Why pay more for something when you can buy it cheaper on the open market?
The option expires worthless, and you:
keep the premium
keep your 100 shares
can sell another covered call if you want
Covered calls often feel like a little paycheck hitting your account just for being patient.
What Happens If The Stock Price Goes Above The Strike Price?
Here’s where the trade-off shows up.
If the stock price rises above the strike price, the buyer may choose to exercise the option. If they do, you’re required to sell your 100 shares at the strike price.
This means:
you still keep the premium
you still make money if you originally bought the shares at a lower price
but you miss out on any gains above the strike price
Covered calls basically cap your upside, but they give you consistent income in return.
It’s like renting out a house you plan to sell in the future. You still get rental income, even if housing prices go up later.
An Example Of A Covered Call
Let’s imagine you own 100 shares of a stock called Stellar Sneakers Co.
You bought each share at $30. Nice and simple.
Right now, the stock is trading for $35. You plan to hold long term, but you wouldn’t mind earning a little extra income in the meantime.
So you decide to sell a covered call.
Step 1: Selling the call
You sell a call option with a strike price of $40. The contract expires in one month, and the buyer pays you a premium of $2 per share.
That’s $200 in your pocket. Instantly.
Step 2: Scenario A
Stock price stays below $40.
Maybe it ends the month at $38.
The buyer doesn’t use the option because why pay $40 when you can buy for $38?
You keep:
your 100 shares
the $200 premium
And you’re free to sell another covered call next month.
Step 3: Scenario B
Stock price rises above $40.
Let’s say it jumps to $48.
The buyer likely exercises the option. You must sell your shares at $40, even though the market price is $48.
Your results:
you keep the $200 premium
you make a profit from buying at $30 and selling at $40
you miss out on the extra $8 per share you could have made
Still a win, but with a ceiling.
Why Do Investors Use Covered Calls?
Covered calls are popular for three reasons:
Extra income. You collect premiums regularly, almost like earning a small paycheck for holding stock.
Reduced downside risk. The premium acts as a cushion if the stock dips a little.
Flexibility. You can choose different strike prices and expiration dates to match your goals.
Covered calls are especially appealing for long-term investors who hold large positions and want to squeeze a little more value out of them.
How KidVestors Brings This Strategy To Life For Kids And Teens
Now here’s where it gets fun. Covered calls might sound like a grown-up strategy, but the core concept is surprisingly accessible.
Kids and teens learn best when you mix real-world examples with hands-on experiences. On our platform, we simplify big concepts into everyday ideas they already understand.
When students learn about covered calls in our stock market modules, we break it down using analogies like:
renting out something you already own
trading future potential for guaranteed income today
making agreements with clear terms
We also use colorful scenarios in our animated lessons, letting students see exactly how the strategy works. After learning the concept, they can jump into our virtual stock market investing simulator where they practice buying stocks, tracking their positions, and understanding how different strategies impact real outcomes over time.
No real money. No risk. Just real learning.
Kids and teens walk away understanding that investing is not just about buying and selling. It is about using smart strategies to maximize what you already own.
We want our students to feel confident, curious, and empowered. Covered calls are just one of the many topics we use to spark that deeper level of financial confidence.
At Last...
Covered calls might seem intimidating at first glance, but once you peel back the big words, you realize the strategy is actually pretty simple. You already own a stock. You agree to sell it at a certain price. And in return, you get paid upfront.
It is steady. It is practical. And yes, beginners can absolutely learn it. Whether you’re an adult exploring income strategies or a student learning the ropes inside KidVestors, covered calls introduce a valuable lesson: there are many ways to grow wealth, and some of them start with using what you already have.
And that’s exactly why we teach it.
If kids and teens can master the building blocks of investing early, imagine what they can do when they’re older. We are here to make sure they get that head start.
Ready to help your kids and teens learn the stock market?
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