A fidelity covered call is an options strategy where an investor sells a call option on shares they already own in their Fidelity brokerage account. This generates premium income while limiting upside potential on the underlying stock.
The strategy is used to generate consistent income from stocks already held, particularly in stable or mildly bullish markets. It's common among investors seeking steady returns without selling their positions outright.
Fidelity offers tools and direct access to options trading through its platform, enabling users to execute covered calls on eligible securities. The process involves selecting a stock, choosing a strike price and expiration date, and placing a sell-to-open order for a call option.
When you sell a covered call, you're agreeing to deliver your shares at a set price (strike price) if the buyer exercises the option. In return, you receive a premium upfront.
For example, suppose you own 100 shares of Apple (AAPL) at $180 per share. You sell one AAPL call option with a strike price of $190, expiring in 45 days, for $3.50 per contract. That's $350 in premium income ($3.50 × 100 shares).
If AAPL stays below $190 at expiration, the option expires worthless. You keep the $350 premium and retain ownership of the shares. If AAPL rises above $190, the option is exercised-you must sell your shares at $190 per share, realizing a $10 gain per share plus the $3.50 premium.
To execute a covered call on Fidelity, you must hold at least 100 shares of the underlying stock. Options contracts are standardized in units of 100 shares. Fidelity requires margin approval for options trading, though covered calls are considered lower risk due to the long stock position backing the short call.
Eligible stocks include major U.S. equities like Microsoft, Amazon, and Johnson & Johnson. Not all securities support options trading-Fidelity's platform displays "Options" availability under each stock's quote.
Options are priced based on volatility, time to expiration, and the stock's current price relative to the strike. Higher implied volatility increases premiums, making it more attractive to sell calls.
There are three possible outcomes depending on the stock's movement at expiration:
| Stock Price at Expiration | Outcome | Net Result |
|---|---|---|
| Below strike price | Option expires worthless | Keep shares + premium income |
| At or above strike price | Option exercised | Shares sold at strike price + premium |
| Between cost basis and strike | Option expires worthless | Gain on stock + premium |
For instance, if you bought AAPL at $170 and sell a $190 call for $3.50, and the stock closes at $185 at expiry, you keep the $3.50 premium and the $15/share gain on the stock-total $18.50 per share profit.
Non-obvious fact: The premium received reduces your effective cost basis. If you paid $180 per share and collected $3.50 in premium, your breakeven point drops to $176.50. This makes the strategy effective for reducing downside risk.
Many assume a covered call locks in gains. That's incorrect. The strategy caps upside beyond the strike price. If the stock surges past the strike, you miss out on additional appreciation.
Another misconception is that selling a covered call is equivalent to selling the stock. It's not. You only sell if the option is exercised. If the stock stays below the strike, you keep both the shares and the premium.
Some confuse covered calls with cash-secured puts. While both are income strategies, a cash-secured put obligates you to buy shares at a set price. A covered call obligates you to sell shares. They serve opposite purposes: one builds a position, the other generates income from an existing one.
This strategy suits investors who own stable stocks they expect to remain flat or rise modestly. It's ideal for dividend-paying stocks where income is prioritized over capital growth.
I've used this strategy on Fidelity with shares of Procter & Gamble (PG), which has consistently traded within a narrow range. Over six months, I collected $1.20 per share in premiums on monthly covered calls, adding nearly 10% annualized income to my portfolio.
It's less suitable during high volatility or earnings season, when large moves increase the chance of early assignment. Fidelity's platform flags such events in the options chain.
The primary risk is opportunity cost. If the stock rises sharply above the strike price, you lose the excess upside. For example, if AAPL jumps to $220 after you sold a $190 call, you're locked into selling at $190 and miss $30 per share.
Another risk is early assignment. Fidelity allows options to be assigned before expiration if the option is in-the-money and the broker acts on the buyer's request. This can force you to sell shares earlier than planned.
According to the CBOE, 15% of options are assigned early annually. Most assignments happen near expiration, but they can occur anytime. Always monitor your positions closely.
Log in to your Fidelity account. Go through to the "Trade" tab. Search for a stock, such as Netflix (NFLX). Click "Options" under the quote. Select "Sell to Open" for a call option. Choose a strike price and expiration date. Enter the quantity (1 contract = 100 shares). Review the risk profile and confirm.
Fidelity provides a real-time profit/loss calculator. You can simulate different scenarios to assess outcomes. The platform also shows historical volatility and implied volatility-key inputs for setting strike prices.
After execution, the premium appears in your account balance immediately. The trade settles in two business days.
If you want higher income, consider a collar strategy-buying a put to hedge downside while selling a call. This limits both risk and reward but protects against losses.
For higher volatility, rolling the option forward (closing the current one and opening a new one with a later expiration) can maintain income. Rolling is common when the stock remains stable but the original option is close to expiration.
For those new to options, start with a single contract and use paper trading to test strategies. Fidelity offers a simulated environment to practice without risking capital.
Always review your account's options approval level. Fidelity requires a Level 2 approval for selling uncovered calls, but covered calls are permitted under Level 1 for most accounts.
Final note: A fidelity covered call is not a guaranteed income tool. Market conditions, timing, and stock behavior determine success. Use it as part of a diversified income strategy-not as a standalone solution.