Robinhood Covered Calls [Complete 2023 Guide]

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Many new or newer investors that use Robinhood have questions about covered calls.

What are they and how are covered calls different from regular calls? What are some important things you should know about covered calls? Are they worth using for a trading strategy on Robinhood?

Let’s dig in and answer these and more questions about using covered calls with Robinhood.

In This Post:

What are Covered Calls?

Covered calls refer to financial transactions in which the investors willing to sell call options own an equal amount of the underlying security.

When executing this strategy, investors holding long-term positions in assets sell (write) call options on the same assets, generating income streams.

 The investors’ long positions in the assets represent the cover since the positions mean that the sellers can deliver the shares in question when the buyers of the call options wish to exercise. 

In simple words, a covered call is a popular option strategy helpful in generating income in the form of options premiums.

When executing a covered call, an investor expects a minor decrease or increase in the underlying stock price for the life of the option.

Call vs. Covered Calls What’s the Difference?

A covered call is an options strategy that comprises selling a call option covered by a long position in the asset. A covered call strategy offers downside protection on the stock in question while the investor generates income out of it.

On the contrary, a regular call option (also called naked call) refers to an options strategy allowing the investor to sell a call option. A naked call provides upside protection in the form of the premium received. 

When you invest in a naked call option, you expect the underlying asset to be neutral to bearish in a short period.

Call vs. Covered Call Example

Suppose you have 500 stock shares at $8. The stock is trading at $10, and you are concerned that the stock’s price may fall within six months. Then you can opt to sell like 5 call options trading against their long position. 

Assuming that you choose to sell 5 DEF call options at a strike price of around $15 with an expiry date in six months.

If the stock price remains below the strike price, you will have to keep all your premium on the call options since they will be almost worthless.

However, the case will be different if the stock price rises above $15 since they are long from $8. You make a profit if the price rises.

Now that you are short-call options, you are obligated to provide shares at the set strike price by or on the expiration date. But this depends on the buyer’s willingness to exercise their right.

In another scenario, consider another stock investor selling a call option with a set strike price of $15 and expiring the following week.

The investor will be in a naked call position with unlimited downside protection potential. In the long run, the investor will receive the premium as the reward for risk by taking this investing route.

Can You Sell Covered Calls on Robinhood?

Yes! You can sell covered calls on Robinhood if you believe a stock price has the potential to rise or remain relatively stable in the near future. This is referred to as having a neutral-to-bullish outlook.

More so, you need to have enough shares in the underlying stock to sell covered calls on Robinhood. The shares you own will cover the short call when it is assigned.

One of the main reasons to utilize this strategy of selling covered calls on Robinhood is that it helps you earn additional income depending on the number of stocks you own. 

If you plan to hold the underlying shares, then selling covered calls on Robinhood can allow you generate income in the form of premiums. You monetize your stock holdings.

Apart from generating income, selling covered calls can be a strategy to protect yourself in case the stock price goes down.

You use the premium received for the call to offset your losses when the stock price declines. However, selling calls cannot entirely protect you from making losses when the stock price goes below the breakeven price.

The following are some of the other factors you may need to consider when selling covered calls on Robinhood:  

  • Expiration date
  • Strike price
  • Contract
  • Premium

Why Would You Sell a Covered Call?

Investors sell covered calls to target a stock selling price above the current price. In other words, selling a covered call is a way of generating income when a stock price has the potential to remain stable or rise in the near future. 

For instance, if you purchase a stock for $39.30 per share and sell a 40 call for 0.90 per share, you receive a total of $40.90 if the covered call is assigned. The total amount of money received excludes commissions.

Suppose the stock price only increases to $40.50; the assigned covered call will deliver a total of $40.90.

If you are willing to sell your stock at this price, then the covered call allows you to target the objective of generating additional income even when the stock price does not rise that high.

How to Sell Covered Calls on Robinhood (Step-By-Step)

Selling covered calls on Robinhood takes a flexible process that you need to follow step-by-step to reduce the risk of losing money when the value of the portfolio takes a bearish trend.

You may also want to sell your covered call if you want to monetize your stock after the stock price rise.

Follow the following steps to sell a covered call on Robinhood successfully::

Step #1

You begin by opening the Robinhood platform to identify the option contracts you intend to sell. You should be keen not to choose an option that is about to expire or that you do not want to hold.

Moreover, you can decide to sell multiple contracts simultaneously. However, you will need to single out the particular contracts you intend to sell.

Step #2

After identifying the contracts you intend to sell, the next step involves tapping the trade icon on the Robinhood platform and entering the contracts you want to sell.

It may be essential to indicate the price limit your contracts will sell at during this step.

Step #3

In the third step, any serious investor must be ready for the execution of the sale. However, you may need to tap on the preview option on the platform to review the summaries of the first two steps.

If you are satisfied with the summaries, you may swipe the page and seal the deal by pressing the submit button to complete the selling process.

Note that selling covered calls of Robinhood is a straightforward task that can help you dodge the risk of losing your investment. 

More so, trading options are highly risky when compared to stock investments because losses occur speedier, making you lose your money.

Therefore, it may be essential to get Robinhood’s approval before starting to trade options.

In some other cases, trade options may entail complicated strategies, increasing the risks. Consequently, a wise investor like you should consider their investment objectives and the potential risks before striking a move.

Does Robinhood Charge Fees for Selling a Covered Call?

Selling covered calls on Robinhood has been commission-free and may remain even in the future.

The platform does not charge fees when you open an account, maintain the account, or transfer money to the account.

However, self-regulatory organizations (SROs) like Financial Industry Regulatory Authority (FINRA) may charge you a small fee when making sell orders.

The SROs only charge a fee for every sell order, notwithstanding the brokerage. When the charges are made, Robinhood takes the initiative of passing them to the customers and remitting them to the appropriate SROs.

Are There Risks for Selling a Covered Call?

Selling a covered call involves two risks. You risk losing your money in case the stock price decreases below the breakeven price.

The breakeven price refers to the stock buying price less the option premium you get. More so, there is a substantial risk for any strategy involving stock ownership.

Can You Sell a Call Option Before the Expiration Date?

Yes! You can sell a call option prior to its expiration date. Investors consider call options as derived instruments whose prices are fixed on the price of underlying stocks.

Therefore, buyers are free to sell the options contracts to any potential buyer even if the deal hasn’t reached its expiry. You can sell the call option at the current market price in such an instance.

Wrapping Up

A covered call refers to financial transactions in which you sell your call options if you own an equal amount of the underlying stocks.

Selling covered calls can be risky, especially if you’re not an experienced trader in stocks. This guide has defined covered calls, compared covered calls to regular calls, and guided you through the process of selling covered calls.

I hope this guide has helped you learn how to sell covered calls on Robinhood to avoid making losses and losing your investment. It is a pleasure to see you come back for more guides on this topic and many others.