Have you ever looked at your long-held stocks and thought, "How can I make this work harder for me?" If so, you're in the right place! Today, we're diving deep into the world of covered calls on Webull, a powerful strategy for generating income from your existing stock holdings. It's a fantastic way to potentially boost your returns, especially in sideways or slightly bullish markets.
Let's break down how to implement this strategy on Webull, step-by-step, ensuring you understand each crucial aspect.
Understanding the Covered Call Strategy
Before we jump into Webull, let's quickly solidify what a covered call is. A covered call involves two main components:
Owning at least 100 shares of a particular stock: This is the "covered" part. You must own the underlying shares to write (sell) a call option. Each option contract typically controls 100 shares.
Selling (writing) a call option on those shares: By selling a call option, you give the buyer the right, but not the obligation, to purchase your 100 shares at a predetermined price (the "strike price") before a specific date (the "expiration date"). In return for granting this right, you receive a non-refundable payment called the "premium."
The Goal: The primary goal of a covered call is to generate income (the premium) from your existing stock holdings.
The Trade-off: The trade-off is that you limit your upside potential on the stock. If the stock price rises significantly above your strike price before expiration, your shares will likely be "called away" (assigned), and you'll be obligated to sell them at the strike price, missing out on further gains.
Now, let's get hands-on with Webull!
Step 1: Ensure You Have Options Trading Approval on Webull
This is perhaps the most critical initial step! Webull, like all brokers, requires you to be approved for options trading. If you haven't done this already, you won't be able to place covered call orders.
Sub-heading: How to Apply for Options Trading on Webull
Open the Webull App or Desktop Platform: Log in to your account.
Navigate to the "Trading" or "Account" Section: Look for something like "More Services" or "Account Details."
Find "Options Trading": There should be a specific section or link to apply for options trading.
Complete the Application: You'll be asked a series of questions about your financial situation, investment experience, and trading objectives. Be honest and accurate. Webull uses this information to determine your options trading level. For covered calls, you typically need at least Level 1 or 2 approval, as it's considered a relatively lower-risk strategy.
Submit and Wait for Approval: Approval usually takes a business day or two. You'll receive a notification once your application is processed. Do not attempt to place an options trade until you are approved.
Step 2: Identify a Suitable Stock for Your Covered Call
Now that you're approved, it's time to pick the right stock. This is crucial for a successful covered call strategy.
Sub-heading: Key Characteristics of a Good Covered Call Candidate
You Already Own 100+ Shares: This is fundamental. If you don't own the shares, it's a "naked" call, which is a much riskier strategy and requires higher options approval.
Neutral to Slightly Bullish Outlook: Covered calls perform best when the stock is expected to trade sideways or experience a modest increase. If you anticipate a massive rally, a covered call will cap your profits. If you expect a significant drop, the premium might not offset the stock's decline.
Stable or Low Volatility: Highly volatile stocks can lead to quick price swings, potentially forcing early assignment or making it harder to manage the trade.
Sufficient Options Liquidity: Look for stocks with active options markets. This means high open interest and low bid-ask spreads for the options contracts, allowing you to enter and exit trades easily at fair prices.
Avoid Stocks with Impending Major News: Earnings reports, FDA approvals, or other significant announcements can cause unpredictable price movements.
Pro-Tip: Use Webull's research tools! You can analyze a stock's historical volatility, news, and analyst ratings directly within the platform.
Step 3: Navigate to the Options Chain on Webull
Once you've chosen your stock, it's time to find the right options contract.
Search for the Stock: In the Webull app or desktop platform, enter the ticker symbol of the stock you want to trade (e.g., AAPL, MSFT, TSLA).
Go to the "Options" Tab: On the stock's detail page, you'll see various tabs like "Quotes," "News," "Analysis," and "Options." Click on the "Options" tab.
Familiarize Yourself with the Options Chain: The options chain will display a table of available options contracts for that stock. You'll see:
Expiration Dates: A list of dates when the options contracts expire.
Strike Prices: The predetermined prices at which the underlying stock can be bought or sold.
Call Options (Left Side): These are on the left side of the chain, showing the Bid, Ask, Last, Change, Volume, and Open Interest for call options.
Put Options (Right Side): These are on the right side.
Step 4: Select Your Covered Call Parameters (Strike Price and Expiration Date)
This is where you make crucial decisions for your covered call.
Sub-heading: Choosing the Expiration Date
Time Horizon: How long do you want to hold this covered call? Shorter-term options (e.g., 1-4 weeks) tend to have faster time decay, which is beneficial for option sellers. Longer-term options (e.g., 30-90 days) offer more premium but tie up your shares for longer.
Event Calendar: Consider any upcoming events for the stock. You might want to avoid expiration dates just before earnings, for example.
Remember: The closer the expiration date, the faster the time decay works in your favor.
Sub-heading: Choosing the Strike Price
This is arguably the most important decision.
Out-of-the-Money (OTM) vs. At-the-Money (ATM):
Out-of-the-Money (OTM): The strike price is above the current stock price. This is generally preferred for covered calls as it gives the stock more room to run before it gets called away, and there's a higher probability the option will expire worthless. You receive a smaller premium.
At-the-Money (ATM): The strike price is equal to or very close to the current stock price. These options offer a higher premium but also a higher chance of assignment if the stock moves even slightly higher.
In-the-Money (ITM): The strike price is below the current stock price. Selling ITM calls offers the highest premium, but also carries the highest risk of immediate assignment and limits your stock's upside severely. Generally not recommended for typical covered call strategies aimed at income generation.
Your Profit Target / Assignment Comfort Level:
Higher Strike Price: Less premium, but more upside potential on your stock before assignment.
Lower Strike Price: More premium, but less upside potential on your stock before assignment.
Think about it: Are you comfortable selling your shares at this strike price if the option is exercised?
Step 5: Initiate the Covered Call Order on Webull
Once you've decided on your expiration date and strike price, it's time to place the order.
Tap on the Chosen Call Option: On the options chain, locate the call option with your desired strike price and expiration date. Tap on the "Ask" price (as you are selling the option, you want to receive the bid price, but Webull's interface often defaults to showing the ask or a single price for initiating).
Select "Sell to Open": This is crucial. You are selling a new options contract. Webull will automatically recognize that you own the underlying shares and will classify it as a "Covered Call."
Enter Order Details:
Quantity: This refers to the number of options contracts. Remember, 1 contract = 100 shares. So, if you own 500 shares, you can sell up to 5 contracts.
Order Type:
Limit Order (Recommended): Set a specific price (the premium) you want to receive for selling the option. This gives you control over the price.
Market Order (Not Recommended for Options): This executes immediately at the current market price, which can lead to unfavorable fills due to wider bid-ask spreads in options.
Price: If using a limit order, enter the premium you wish to receive per share (e.g., $0.50 for a $50 premium per contract).
Time in Force:
Day: The order is active only for the current trading day.
Good Till Canceled (GTC): The order remains active until it's filled or you cancel it.
Review and Confirm: Double-check all the details: stock symbol, expiration date, strike price, action (Sell to Open), quantity, and limit price.
Place Order: Confirm and submit your order.
Congratulations! You've just placed a covered call on Webull!
Step 6: Monitoring and Managing Your Covered Call
Placing the order is just the beginning. Active management is key to maximizing your covered call strategy.
Sub-heading: What to Watch For
Stock Price Movement:
If the stock stays below the strike price: Good news! The option will likely expire worthless, and you keep the premium and your shares.
If the stock approaches or exceeds the strike price: You might consider "rolling" the option (see FAQs) or letting it be assigned.
If the stock drops significantly: The premium you received will help offset some of the stock's losses, but you still bear the risk of holding the stock.
Time Decay (Theta): Options lose value as they get closer to expiration. This is beneficial for option sellers. You'll see the premium value of your sold call gradually decline.
Implied Volatility (IV): A sudden increase in IV can temporarily increase the option's premium, which could be an opportunity to buy back the call for a profit if you want to close the position early. A decrease in IV is generally favorable for sellers.
Sub-heading: Deciding Whether to Close Early or Let Expire
Option is Deep Out-of-the-Money and Approaching Expiration: Often, it's best to let it expire worthless. You keep the full premium.
Option is Approaching the Money (or In-the-Money) and You Don't Want to Be Assigned: You can "buy to close" the option. This means you buy back the same option you sold. If you buy it back for less than you sold it for, you profit. If for more, you incur a loss on the option, but you retain your shares.
Rolling the Covered Call: If the stock price is above your strike price and you want to avoid assignment while still generating income, you can "roll" the covered call. This typically involves buying back your current call and simultaneously selling a new call with a higher strike price and/or a later expiration date. This usually results in a net credit or a small debit, extending your income generation and giving the stock more room to run.
Covered Call Strategy Benefits and Risks
Benefits:
Income Generation: The primary benefit is the premium you receive, which adds to your overall returns.
Lowered Cost Basis: The premium effectively reduces your average cost per share of the underlying stock.
Capital Preservation: In a sideways or slightly down market, the premium helps cushion against minor stock price declines.
Flexibility: You can adjust strike prices and expiration dates to suit your market outlook.
Risks:
Capped Upside Potential: This is the main drawback. If the stock rallies significantly, you miss out on gains above your strike price.
Assignment Risk: If the stock closes above your strike price at expiration (or is exercised early), you will be obligated to sell your shares.
Stock Price Decline: While the premium offers some cushion, you still bear the full risk of the underlying stock falling significantly. The premium might not be enough to offset substantial losses in the stock's value.
Opportunity Cost: The capital tied up in the shares could potentially be used for other investments that might offer higher returns if the stock skyrockets.
10 Related FAQ Questions
How to get options trading approval on Webull?
You can apply for options trading approval directly within the Webull app or desktop platform by navigating to your account settings and looking for the "Options Trading" application. You'll need to answer questions about your financial situation and trading experience.
How to close a covered call on Webull before expiration?
To close a covered call on Webull, you will place a "Buy to Close" order for the exact same options contract you sold. This effectively cancels your obligation, and you will either realize a profit (if you buy it back for less than you sold it for) or a loss (if you buy it back for more).
How to roll a covered call on Webull?
While Webull might not have a dedicated "roll" button, you can achieve this by placing two separate orders: first, a "Buy to Close" order for your current covered call, and second, a "Sell to Open" order for a new covered call with a different (typically higher) strike price and/or a later expiration date. You can try to execute these as a single multi-leg order if Webull's interface supports it for your approval level.
How to choose the best strike price for a covered call?
The "best" strike price depends on your outlook. For income generation with a slightly bullish to neutral outlook, an out-of-the-money (OTM) strike price (above the current stock price) is generally preferred. This provides some upside room before assignment and offers a reasonable premium.
How to choose the best expiration date for a covered call?
Shorter-term expirations (e.g., 1-4 weeks) benefit more from time decay, which is good for sellers. However, they require more frequent management. Longer-term expirations offer more premium but tie up your shares for a longer period and have slower time decay.
How to calculate the maximum profit of a covered call?
The maximum profit for a covered call is the premium received from selling the call option plus any appreciation in the stock price up to the strike price. Maximum Profit = (Premium Received per Share) + (Strike Price - Original Stock Purchase Price) if the stock is called away. If the stock isn't called away, your profit is just the premium.
How to manage assignment risk in a covered call?
If the stock price approaches or goes above your strike price, you have a few options: let it be assigned (sell your shares at the strike), buy back the call option to close the position (and keep your shares), or roll the call to a higher strike price and/or later expiration date.
How to find liquid options contracts on Webull?
Look for options contracts with high "Volume" and "Open Interest" in the options chain. A tight "Bid-Ask Spread" also indicates good liquidity, meaning you can enter and exit trades more efficiently.
How to set a stop-loss for a covered call?
While you can't directly set a stop-loss on the option itself for a covered call, you can set a stop-loss order on your underlying stock shares. This protects you from significant downside if the stock price drops, but it will close your entire stock position, not just the option.
How to use Webull's options analysis tools for covered calls?
Webull offers various analysis tools, including options chains with implied volatility, Greeks (Delta, Gamma, Theta, Vega), and potentially profit/loss diagrams for strategies. Utilize these to understand the theoretical profit/loss scenarios for your chosen strike and expiration.