How to Sell Covered Calls on Robinhood | Robinhood Covered Calls Guide

Covered calls are a popular strategy for generating income and reducing risk from owning stocks.

In this guide, we will explain what covered calls are, how to sell them on Robinhood, and what are the best stocks to use for this strategy.

What is a Covered Call?

A covered call is when you own 100 shares of a stock and then sell a call option against them. Selling the call option allows you to collect a premium as income and reduce your downside risk.

When you sell a covered call, you pick a strike price for the call option. If the stock goes over the strike price before it expires, you may be forced to sell your 100 shares at the strike price, but you will also still collect the premium.

For example, let’s say you own 100 shares of XYZ stock at $50 per share. You sell a call option with a strike price of $55 and an expiration date of one month later. You receive $2 per share as the premium. This means that you collect $200 as income and lower your cost basis to $48 per share.

If XYZ stock stays below $55 by the expiration date, you keep your 100 shares and the $200 premium. You can then sell another covered call to generate more income.

If XYZ stock goes above $55 by the expiration date, you will have to sell your 100 shares at $55 per share. You will still keep the $200 premium, but you will miss out on any additional gains above $55. Your total profit will be $700 ($500 from selling the shares and $200 from the premium).

Can You Sell Covered Calls on Robinhood?

Yes, you can sell covered calls on Robinhood. Robinhood is a popular trading app that allows you to buy and sell stocks, options, ETFs, and cryptocurrencies with no commission fees.

However, Robinhood has some drawbacks when it comes to selling covered calls. One of them is that Robinhood technically doesn’t charge commissions per contract either, but they will likely get your order filled at a worse price than other brokers. This is because Robinhood sells your order flow to market makers who may not give you the best execution. This can reduce your profit margin and negate the ‘free commissions.’

This is why we do not recommend you sell covered calls on brokers like Robinhood due to the poor trade fills they provide.

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How to Sell a Covered Call on Robinhood

If you still want to sell covered calls on Robinhood, here are the steps you need to follow:

1- Own 100 Shares of a Stock

The first step to selling a covered call is to acquire 100 shares of a stock. Ideally, it is a stock you don’t mind owning for a long time.

You can buy 100 shares of any stock on Robinhood by tapping on the buy button and entering the quantity.

2- Type the Stock, Click Trade → Trade Options

Next, go to the stock, click trade, then trade options to open the options chain. The options chain shows you all the available options contracts for that stock with different strike prices and expiration dates.

3- Select the Expiration Date

Next, select the expiration date at the top of the page. Generally, people will sell covered calls around 30-60 DTE (days to expiration). This is because shorter-term options tend to have higher premiums and decay faster than longer-term options.

However, you can also choose longer-term options if you want to lock in your selling price for a longer period or collect more premium upfront.

4- Tap Sell & Call

Next, tap on sell and call so you can pick a covered call to sell. A call option gives the buyer the right to buy the stock at a certain price before a certain date.

5- Select the Strike Price

Next, select the strike price. Remember that this is the price you want to stock to stay below if you don’t want to sell your shares. If the stock goes above your strike price by the expiration date, you may be forced to sell your shares at that price but still collect the premium.

The strike price you choose depends on your risk-reward preference and outlook for the stock. Generally, higher strike prices have lower premiums but higher chances of being exercised. Lower strike prices have higher premiums but lower chances of being exercised.

6- Enter the # of Contracts & Review the Order

Next, enter the number of contracts you want to sell. For every 100 shares you own, you can sell one covered call contract. Each contract represents 100 shares of the underlying stock.

After entering the number of contracts, review the order details and confirm the trade. You will see the premium amount credited to your account and the shares reserved for the covered call.

What are the Best Stocks to Sell Covered Calls on Robinhood?

The best stocks to sell covered calls on Robinhood depends on your own personal preferences. Ideally, you will pick a stock that you don’t mind owning forever and have conviction in.

Some factors to consider when choosing a stock for selling covered calls are:

The volatility of the stock: Higher volatility stocks tend to have higher premiums, which means more income for you. However, they also have higher chances of moving above your strike price, which means more risk of losing your shares.
The growth potential of the stock: Higher growth stocks tend to have higher premiums, which means more income for you. However, they also have higher chances of moving above your strike price, which means more opportunity cost.

Some examples of stocks that are popular for selling covered calls on Robinhood are:

Apple (AAPL): A tech giant with strong fundamentals, loyal customers, and consistent growth. Apple pays a modest dividend and has moderate volatility.
Tesla (TSLA): A disruptive innovator with high growth potential, loyal fans, and high volatility. Tesla does not pay a dividend and has a high chances of moving above your strike price.
SPDR S&P 500 ETF Trust (SPY): An ETF that tracks the performance of the S&P 500 index, which represents the US stock market. SPY pays a low dividend and has low volatility.

What are the Risks of Selling Covered Calls on Robinhood?

Selling covered calls on Robinhood is not a risk-free strategy. There are some risks involved that you should be aware of before you start selling covered calls. Some of these risks are:

Missing out on upside potential: If the stock goes above your strike price by the expiration date, you will have to sell your shares at that price and miss out on any additional gains. This can be frustrating if the stock keeps rising after you sell your shares.
Losing money if the stock drops hard: If the stock drops hard below your cost basis, your covered call will not nearly cover all of your losses. Plus, it will be harder to sell another covered call above the price you own the shares. This can be painful if the stock keeps falling after you sell your call.
Getting assigned early: If the stock goes above your strike price before the expiration date, the buyer of your call option may exercise their right and force you to sell your shares at that price. This can happen if the stock pays a dividend or has a significant event that affects its price.

How to Learn More About Trading Options

Selling covered calls is just one of many ways to trade options. Options are versatile instruments that can help you generate income, hedge risk, speculate on price movements, and create custom strategies.

If you want to learn more about trading options, we recommend joining the HaiKhuu Trading community. HaiKhuu Trading is a platform where you can get free daily morning reports, live trading calls, and access to a large community of traders who all learn together.

FAQ

Can you sell poor man's covered calls on Robinhood?

Yes, you can sell a poor man’s covered call on Robinhood, but it is not recommended because Robinhood may automatically exercise your options at inopportune times.

Does Robinhood have level 4 options?

Level 4 options generally allow you to sell naked or uncovered options. Robinhood does not allow level 4 options or the ability to sell naked options.

Do you lose your shares in a covered call?

You will only lose your shares with a covered call if the stock goes above your strike price and the buyer decides to exercise. If the stock price is above your strike price at expiration your shares will be called away (sold).