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Most people look at the stock market and see a casino. They see flashing red and green lights, they see gambling, and they see risk. But did you know you can generate passive income from stocks you already own? What is a covered call? Is this too good to be true?

When you shift your mindset from a “trader” to an “owner,” the market looks very different. It stops looking like a casino and starts looking like a piece of real estate.

If I owned a rental property, I wouldn’t just let it sit empty hoping the property value goes up in 10 years. I would rent it out to generate cash flow while and hope it goes up in value. Investing is speculation, you are expecting something to be worth more in the future. But you dont know it’s going to be worth more.

A covered call is simply renting out stocks you already own.

It is the single most powerful tool for the “Owner Class” to generate income, lower their cost basis, and reduce risk without having to sell the asset (unless you get a great price).

The Mechanics: How It Actually Works

In the simplest terms, a covered call is a contract between two people:

1. The Owner (You): You own 100 shares of a stock.
2. The Renter (The Buyer): Someone who wants the option to buy your shares later.

You agree to sell the “renter” the right to buy your shares at a specific price (the Strike Price) by a specific date (the Expiration Date).

In exchange for giving them this right, they pay you cash upfront. This cash is called the Premium and its yours the second the transaction happens. It might be difficult to believe but there is no catch here. You are selling the renter an option (not obligation) to buy your shares at a later date and for that they give you cash.

• If the stock price stays below the Strike Price: The contract expires worthless. You keep your shares, and you keep the cash premium. (This is like collecting rent and the tenant moving out).
• If the stock price goes above the Strike Price: You are obligated to sell shares at that price. You keep the cash premium plus the profit from selling the stock at the strike price. This would be like the renter paying you rent for a month, then giving you an offer on the property and you accepting it. If you agreed on the right strike price to begin with, then who would complain about collecting a months rent and selling your property for a tidy profit?

Why “Coverage” Matters

The term “Covered” is the most important part of this equation. This is the difference between renting out an asset you own and gambling with huge long-tail risks that can absolutely crush you.

In the options world, “Naked” means you are selling (going short) an option without owning the underlying asset. That is gambling and using leverage to do it. That is how people blow up their accounts.

Example:

• Say I sell naked calls on Company X. If the stock starts at $100 and I sell 10 call options with a strike of $105 I could collect about $20 per contract so $200 in total. Now I am obligated to sell 10 options x 100 shares = 1,000 shares in total at the agreed upon strike price of $105.
• That $100 per share price could balloon up to $200 in the course of a week or two on the announcement Company X is being acquired. Different variations of this have happened to me dozens of times. I now have the obligation to sell shares for $105 and the market value is $200, I own no shares. I now have to buy 1,000 shares at a price of $200 a share. Thats $200,000 in share purchases I need to make only to turn around and sell that at $105 per share. That would be a total outlay of $200,000 and a total loss of $95,000 all for a measly $200 premium I collected earlier in the week. That risk reward is pretty horrendous. Technically speaking the potential downside loss is unlimited. The maximum potential upside is…. the amount you collected in premium which is meager to say the least.

“Covered” means you own the shares. You are fully collateralized. If the stock goes to the moon and you have to sell, you simply hand over the shares you already have in your account. You aren’t scrambling to buy them at a loss. If you are going to sell call options, I HIGHLY RECOMMEND THIS AND ONLY THIS. Naked options are as dangerous as it gets and I don’t even think sophisticated institutions should be using them let alone a retail investor.

The Owner’s Mindset: Yield vs. Appreciation

The biggest criticism of covered calls is: “But what if the stock goes up 20% in a week? You capped your upside!”

This is the Trader mindset talking. They are obsessed with the lottery ticket potential.

The Owner mindset is different. I am obsessed with Cash Flow. When I sell a covered call, I am essentially saying: “I am willing to sell my shares, but only if you pay me 20% over market value. And while I wait for you to decide, you have to pay me rent.”

If the shares get called away, I sold at a profit and kept the rent. If they don’t, I keep the asset and rent it out again next week.

A Real World Example: My Strategy

I don’t just teach this; I live it. For the past decade, I have been using this strategy to generate income on my Tesla position.

I am a long-term bull, so my goal is to never actually lose the shares but I acknowledge that is a real exit strategy I might have to take one day. The options I sell are “Out of the Money” meaning the strike price is higher than the current price to I don’t want to sell my Tesla shares, I have admittedly grown emotionally attached to them (is that so bad?)

For example, if the stock is at $200, I might sell a call for $220.

• I collect the premium immediately.
• The stock has to jump 10% before I am even at risk of selling.
• I use that income to buy more shares, increasing my “rental property” portfolio.

I wrote an in depth article about my real world experience selling covered calls over the past decade. It covers lessons learned, scrapes and bruises I gained, and obstacles I overcome along the way. Spoiler alert, this strategy sounds perfect in theory, but once it’s your shares getting called away it feels like you left money on the table. Take it from me, that feeling of missed upside does hurt.

The Secret Sauce: Time Is On Your Side

As an owner (option seller), time is your best friend. As a renter (option buyer), time is your enemy.

Every day that passes where the stock doesn’t skyrocket, the value of the option decreases. This is known as Theta Decay. It’s the daily rental rate eroding the value of the contract.

This decay doesn’t stop on Friday. It happens every single day, even when the market is closed.

Conclusion: Stop Speculating, Start Owning

What is a covered call? Selling covered calls isn’t a “get rich quick” scheme. It’s a “get wealthy inevitably” system.

It shifts your financial reliance away from selling your time (salary) and toward “renting out” your assets. It forces you to engage with the market not as a gambler hoping for a lucky break, but as a landlord collecting rent every week.

Take ownership of your portfolio. Make it work for you.

Written by Hayden