Written by Zac Brabin, Director – iInvest Trading & Advisory.
Last week we looked at selling cash-covered puts – getting paid to wait for a share price you want. This is its twin: getting paid on shares you already hold. It’s called a covered call, and for long-term shareholders it’s one of the most widely used option strategies on the ASX.
How it works, in plain terms
When you sell a call option, you’re agreeing to sell your shares at a set price (the strike price) if the buyer of the option exercises it, any time up to expiry. In exchange, you’re paid a premium upfront – yours to keep whatever happens next.
“Covered” means you already own the shares you might have to deliver. That’s what keeps this conservative: you’re not exposed to the unlimited risk of selling calls over shares you don’t own. You’re simply agreeing to sell a holding you have anyway, at a price above where it trades today – and being paid for that agreement.
Think of it like renting out a spare room in a house you own: the asset keeps working for you, and you collect income for granting someone limited rights over it.
There are two outcomes, and like the cash-covered put, both can work in your favour.
A worked example: NAB
Let’s say you hold 2,000 NAB shares and the price is $40.50. You’d be content to take profits if the shares reached $41.00, so you sell 20 call contracts (each covers 100 shares) at the $41.00 strike, with around two months to expiry, and you’re quoted a premium of about $0.70 per share.
The premium you collect upfront: 2,000 shares x $0.70 = $1,400, credited to your account when the trade is placed – about 1.7% on the value of your holding, in addition to any dividends you receive while you still own the shares.
The chart below shows how this compares with simply continuing to hold. The covered call sits $0.70 ahead at every price below the strike, then flattens: above $41.00, your shares are sold and your gain is capped.
Payoff at expiry: the solid line is the covered call (hold shares + sell the $41.00 call); the dotted line is simply holding NAB at $40.50.
Outcome one: NAB stays below $41.00
The call expires worthless – nobody exercises the right to buy at $41.00 when the market is lower. You keep your shares, you keep any dividends, and you keep the full $1,400 premium. Many long-term holders repeat the process, selling a new call each expiry to generate income from a holding they intend to keep anyway.
Outcome two: NAB rises above $41.00
Your shares are “called away” – sold at $41.00. Between the sale price and the premium, you receive an effective $41.70 per share, about 2.96% above where the shares traded when you placed the trade (before brokerage, and not annualised). You wanted to take profits at $41.00; the market obliged and paid you a premium on top.
The trade-offs, stated plainly
Your upside is capped. If NAB runs to $43, you still sell at $41.00 – in this example, once the shares finish above about $41.70, simply holding would have done better. Selling calls suits shares you’re genuinely willing to sell at the strike, not shares you’d hate to part with.
The premium is not downside protection. If NAB falls, you wear the fall just as any shareholder does – the $0.70 simply cushions the first 70 cents of it. A covered call is an income strategy, not a hedge.
Dividends and early exercise interact. If the sold call is American-style, the buyer can exercise early – and calls over dividend-paying shares are sometimes exercised just before the ex-dividend date, meaning the shares (and that dividend) go to the buyer. Exercise style and dividend timing are part of the conversation with your broker before the trade goes on.
Common questions
Can I keep my franking credits?
Dividends and their franking go to whoever holds the shares on the ex-dividend date. If your shares are called away before then, the dividend isn’t yours – one reason strike and expiry selection around dividend dates matters. Our franking credits explainer covers how franking works.
Can I close the position early?
Yes – a sold call can usually be bought back at the market price before expiry, at a profit if it has cheapened or a loss if it hasn’t. Holders often do this to release the shares before results or a dividend.
Where can I read more from the regulator?
ASIC’s Moneysmart site has a plain-language guide to exchange traded options, including a covered call example with both outcomes – and the missed-gain trade-off – worked through. Read it alongside the ASX booklet before your first trade.
What if I don’t own 100-share multiples?
Each contract covers 100 shares, so covered calls work in round lots. Your broker will size the position to your holding.
Want to talk covered calls through with the desk?
Send us an enquiry and we will take it from there – or call our Burleigh Heads office on 07 5520 8788. For the desk’s current thinking each week, watch the Options Playbook.
General information only. This example is illustrative, based on hypothetical pricing, and does not constitute personal financial advice. It does not take into account any individual’s objectives, financial situation or needs, and is not a recommendation to buy or sell NAB shares or options. Prices move constantly and the figures used here are for explanation only, excluding brokerage, exercise fees and dividends. Options involve significant risk and are not suitable for all investors; before trading options, read the relevant disclosure documents including the ASX booklet “Understanding Options Trading” and our Financial Services Guide. iInvest Trading & Advisory is a Corporate Authorised Representative (No. 431611) of Zodiac Securities Pty Ltd (AFSL No. 398350).
