Covered Call Strategy: How to Invest Using Options

The covered call strategy combines the allure of earning additional income from investments with the goal of reducing investment risk. This moneyland.ch guide provides all the most important information about investing with covered calls. 

What is the covered call strategy?

The covered call strategy is an investment strategy that is based on options. You, as the investor, sell call options for securities in your portfolio (stocks or ETFs, for example). The buyer of the call option gets the right – but not the obligation – to buy the specified asset at a certain price at a certain time. The call options are covered by the underlying assets in your portfolio.

If the option’s buyer chooses to exercise their right to buy the underlying asset, you are obligated to sell the asset to them at the predetermined price (the strike price).

What are the advantages of the covered call strategy?

The goal of a covered call strategy is to increase the income you earn from the assets you hold. This is possible because every time you sell a call option, the buyer pays you a premium for the option. The size of the premium varies based on a number of factors such as the base price and the length of the term. On the flip side, using options limits your potential returns because the strike price you define for an option you sell can also end up being lower than the market price of the asset (a stock, for example) at the end of the term. The option gives the buyer the right to buy the asset at this lower price.

Using a covered call strategy is primarily interesting if you expect market prices for your assets to stagnate or only climb very moderately (refer to the box below). If the value of your assets drops, the premiums you earn by selling options can help to compensate for the lost value. Because of that, a covered call strategy can be used to hedge against losses.

Example of a covered call strategy

You have a stock worth 100 francs per share in your portfolio. You sell a call option for that stock with a strike price of 105 francs per share. The option’s buyer pays you a premium of 3 francs per share for the option.

These are the possible scenarios for how transaction could develop:

• At the end of the predetermined option term, the price per share is less than 105 francs: In this case, you keep your shares, and pocket the option premium of 3 francs per share.
• At the end of the predetermined option term, the share price has reached the option’s strike price of 105 francs: In this case, you sell the stock for 105 francs per share, and keep the option premium of 3 francs per share. Your return is 3 francs per share.
• At the end of the predetermined option term, the stock price is higher than 105 francs: In this case, you sell the stock for 105 francs per share, and receive the option premium of 3 francs per share on top. If the market price of the stock is higher than 108 francs, then you will have an opportunity cost, because the price you could have gotten on the market is higher than the combined strike price and premium earnings (108 francs).

To use options, you need to have a stock brokerage account. Not all Swiss banks offer options trading. You can use the interactive trading comparison on moneyland.ch to filter stockbrokers based on the types of trading instruments they offer. That makes it easy to find out which stockbrokers let you buy and sell options. Just select the “Options” filter under “Specialized asset types” to limit comparison results to stockbrokers with options trading.

Can I invest in covered calls using ETFs?

There are specialized exchange-traded funds (ETFs) that offer an alternative if you prefer not to trade options yourself, or do not have the time for it. Covered call ETFs also provide a way to invest with covered calls if your bank does not offer options trading.

When you use a covered call ETF, the process of selling options all happens automatically. These ETFs also have an added benefit of diversification. Your money is spread out across a whole basket of different assets and options. A covered call ETF may invest passively, simply replicating a stock index, but there are also actively-managed ETFs for covered calls.

Covered call ETFs have made a name for themselves with exceptionally high dividend distributions. For example, the Global X Nasdaq 100 Covered Call UCITS ETF D returned a dividend yield of more than 13 percent over the past 12 months (as per June 2025). The bulk of dividends is made up of premiums earned by selling options, with shareholder dividends from the stocks held playing a smaller role.

In addition to the custody fees and brokerage fees charged by your stockbroker, you should also pay attention to the fees charged by the ETF itself. These fees are deducted directly from the fund’s capital, and are shown as the total expense ratio (TER).

What are the risks and disadvantages of covered calls?

There are risks and disadvantages that come with using covered calls for investing, and it is important to be aware of them:

• Time and effort: Implementing a covered call strategy yourself requires more time and effort, compared to a classic buy-and-hold strategy. You have to keep track of the market prices of assets, choose a suitable strike price, and sell options. But that does not apply to using covered call ETFs, in which case you simply hold the ETF and the fund’s managers handle the rest for you.
• Complexity: For inexperienced investors, using covered calls can be very complicated and difficult to understand.
• Returns are capped: The returns you can potentially earn are capped at the option’s strike price. If the price of an asset climbs very high, you will not profit from the additional market growth above the strike price you chose for the option. But on the other hand, you can also reduce losses when market prices fall, thanks to the premiums you earn by selling options.

Who can benefit from using the covered call strategy?

The covered call strategy can be interesting if you want to invest but have relatively low risk tolerance. The income you earn from the sale of options helps to reduce losses. In exchange, you have to be willing to accept lower potential returns. The covered call strategy can also be used as a tool for hedging your investment portfolio. Covered call ETFs are an interesting solution for inexperienced investors who want to use covered calls, thanks to their simplicity.

Using the covered call strategy primarily makes sense if you expect the market to stagnate. You should be aware though that there is no sure way to predict future market developments in advance.

Is using a covered call strategy profitable?

As a basic rule, the returns you can earn by using covered calls are impossible to predict in advance. That is because there is no way of knowing how the value of stocks and other assets will perform in the future. Additionally, the potential returns also depend on other factors, such as which assets you hold and sell options for.

The past performance of a covered call ETF can provide an interesting point of reference. The substantial dividends paid out by the fund cannot hide the fact the total returns over the past years have been somewhat modest. For example, the covered call ETF that replicates the Nasdaq 100 index has performed much weaker than a regular Nasdaq 100 ETF (refer to the graph below)

But it is important to note that the entire concept behind the covered call strategy is accepting capped returns in exchange for offsetting losses with income from option premiums. It is also worth noting that the two-year timespan used for the comparison is very short, considering that diversified stock portfolios are a long-term investment. A comparison based on a longer term is not yet possible, as the covered call ETF used was launched very recently.

In every case, you have to understand that past performance is never an accurate indicator of future performance.

Disclaimer: This article is provided for informational purposes only, and should not be considered as investment advice. The publisher does not accept any liability in connection with this publication.

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