How to Sell a Covered Call on E*TRADE (Step-by-Step) and What Options Level You Need

The Short Answer: What You Need Before You Place the Trade

To sell a covered call on E*TRADE, you need two things: at least 100 shares of the underlying stock in your account, and options approval at Level 1 (covered calls). Once those are in place, you go to the options chain for your stock, select a call strike above the current price, and sell to open one contract per 100 shares you own. The whole process takes under five minutes once your account is approved.

This article walks you through every step — from applying for options trading to placing the order — and shows you a real numbers example using Apple (AAPL) so you can see exactly what the income looks like.

What Options Level Does E*TRADE Require for Covered Calls?

E*TRADE uses a tiered options approval system. Covered calls fall under Level 1, which is the entry-level tier. That makes them the most accessible options strategy on the platform — you do not need margin, you do not need advanced derivatives experience, and you do not need to pass a complex suitability review beyond the basics.

Here is how the tiers stack up:

• Level 1: Covered calls and cash-secured puts (lowest risk, easiest to get) • Level 2: Long calls and puts, protective puts • Level 3: Spreads (debit and credit) • Level 4: Naked options (highest risk, hardest to get)

FINRA Rule 2360 requires brokers to collect financial information before approving options trading. E*TRADE will ask about your income, net worth, investment experience, and trading objectives when you apply. Answering honestly and selecting 'income generation' as an objective is appropriate for covered-call sellers. If you already have a brokerage account but have never traded options, you apply for options approval separately inside your account settings.

How to Apply for Options Trading on E*TRADE

Log in to your E*TRADE account and navigate to Account Settings, then select 'Options Trading.' Click 'Apply for Options.' You will fill out a short questionnaire covering your trading experience, annual income, liquid net worth, and investment goals. For covered calls, select 'income' or 'growth and income' as your primary objective.

E*TRADE typically approves Level 1 applications within one business day, sometimes instantly. If you are denied, you can call E*TRADE customer service and explain that you own shares and want to write covered calls — a strategy the SEC and OIC both classify as a conservative, income-generating approach. Denials at Level 1 are uncommon for investors who already hold stock positions.

Important: you must own the shares before or at the same time you sell the call. Selling a call without owning the underlying stock is a naked call — that requires Level 4 approval and carries unlimited theoretical risk. E*TRADE's system will block the order if you try to sell a call without the corresponding share position.

Step-by-Step: Placing a Covered Call Order on E*TRADE

Here is the exact sequence to place the trade on E*TRADE's web platform or Power E*TRADE app.

Step 1 — Confirm your share position. Make sure you hold at least 100 shares of the stock. Each standard options contract covers exactly 100 shares. If you hold 300 shares, you can sell up to 3 contracts.

Step 2 — Pull up the options chain. Search for your ticker. On the stock's quote page, click the 'Options' tab or go to Trade > Options. Select your expiration date from the dropdown. Most covered-call sellers start with expirations 2 to 6 weeks out, where time decay (theta) works fastest.

Step 3 — Choose your strike price. Look at the call side of the chain. Strikes above the current stock price are out-of-the-money (OTM). The further OTM you go, the lower the premium but the more room the stock has to run before you get called away. A strike with a delta around 0.20 to 0.35 is a common starting range for income-focused sellers.

Step 4 — Enter the order. Click 'Sell to Open' on your chosen strike. Set the order type to 'Limit' and enter a price at or near the mid-point of the bid-ask spread. Avoid market orders on options — the bid-ask spread can be wide and you will leave money on the table.

Step 5 — Review and confirm. E*TRADE shows a confirmation screen with the premium you will collect, the maximum gain, and the breakeven price. Double-check the expiration date, strike, and number of contracts. Click 'Place Order.'

Step 6 — Monitor the position. You can see your open covered call under Portfolio > Positions. The short call will show as a negative quantity (e.g., -1 contract).

Worked Example: Selling a Covered Call on AAPL

Let's say you own 100 shares of Apple (AAPL), currently trading at $213.00. You want to generate income over the next four weeks without selling your shares at a price you would regret.

You open the options chain and look at the calls expiring in 28 days. You find:

• $220 strike call — bid $2.10 / ask $2.25, delta ~0.28 • $225 strike call — bid $1.15 / ask $1.30, delta ~0.18 • $215 strike call — bid $3.80 / ask $4.00, delta ~0.42

You decide the $220 strike fits your goal. You sell 1 contract at a limit price of $2.18 (near the mid-point). E*TRADE credits your account $218.00 immediately (100 shares × $2.18 premium).

What happens at expiration?

Scenario A — AAPL closes below $220. The call expires worthless. You keep the $218 premium and still own your 100 shares. Annualized, that is roughly 12% additional yield on a $213 stock if you repeat monthly.

Scenario B — AAPL closes above $220. Your shares get called away at $220. You receive $22,000 for the shares plus you keep the $218 premium. Your effective sale price is $222.18 per share — better than the $220 strike alone. You miss any gains above $222.18.

Scenario C — AAPL drops sharply to $195. The call expires worthless and you keep the $218 premium, but your shares are now worth less. The premium cushions the loss slightly — your breakeven on the stock position drops from $213.00 to $210.82 — but it does not eliminate downside risk. This is the core risk of covered calls: you still own the stock.

Risks You Need to Understand Before You Sell

Covered calls are not risk-free. Here are the three risks that matter most, stated plainly.

Downside risk is not removed. If AAPL falls from $213 to $180, you lose $33 per share on paper. The $2.18 premium you collected reduces that loss to $30.82 per share, but it does not protect you from a large drop. The OIC describes covered calls as providing only 'limited downside protection' — the premium, nothing more.

You cap your upside. If AAPL jumps to $240 before expiration, your shares get called away at $220. You miss $18 per share of gains above your strike. This is the trade-off: income now in exchange for capped upside later.

Early assignment is possible. American-style equity options (which AAPL options are) can be exercised at any time before expiration. Early assignment is rare but most likely just before an ex-dividend date. If your shares get called away early, you may miss the dividend. Check the ex-dividend calendar before selling calls on dividend-paying stocks.

Tax treatment matters. In the US, the IRS treats premiums received from covered calls as short-term capital gains in most cases. Selling a call can also affect the holding period of your underlying shares under IRS qualified covered call rules — specifically, if you sell an in-the-money call, the holding period on your shares may be suspended. Consult a tax professional or review IRS Publication 550 for details. Canadian investors should check CRA guidance on options income, as premiums may be treated as capital gains or income depending on your trading frequency.

Tips for Getting Better Fills and Managing the Position

Always use limit orders. Place your limit at the mid-point of the bid-ask spread and adjust toward the bid if you need a faster fill. E*TRADE's Power E*TRADE platform shows real-time Greeks and the probability of expiring out-of-the-money, which helps you compare strikes quickly.

Avoid selling calls right before earnings. Implied volatility spikes before earnings reports, which inflates premiums — but the stock can move violently in either direction. Many experienced covered-call sellers skip the earnings cycle entirely or close the position before the announcement.

Consider rolling the position. If the stock rises toward your strike before expiration and you do not want to sell your shares, you can 'roll up and out' — buy back the short call and sell a new one at a higher strike and later expiration. E*TRADE supports this as a single spread order so you pay one commission rather than two.

Keep position size in check. FINRA and most financial educators recommend not concentrating more than 5-10% of your portfolio in a single stock position. If you are writing covered calls on a concentrated holding, the covered call does not reduce that concentration risk — it only adds income on top of it.

What options level do I need to sell covered calls on E*TRADE?

You need Level 1 options approval, which is the lowest tier E*TRADE offers. It covers covered calls and cash-secured puts. You apply through Account Settings under 'Options Trading,' and approval is usually granted within one business day.

Can I sell a covered call in an E*TRADE IRA account?

Yes. E*TRADE allows covered calls in Traditional and Roth IRA accounts at Level 1. Because IRAs are tax-advantaged accounts, the premium you collect grows tax-deferred or tax-free depending on the account type. You still need to apply for options approval within the IRA separately from your taxable account.

How much money do I need to start selling covered calls on E*TRADE?

You need enough capital to own at least 100 shares of the stock you want to write calls against. For example, 100 shares of a $50 stock requires $5,000. E*TRADE has no minimum account balance specifically for covered calls, but you must hold the shares before selling the call.

What happens if my covered call gets assigned on E*TRADE?

E*TRADE automatically delivers your 100 shares to the option buyer and credits your account the strike price times 100. You keep the premium you collected when you sold the call. If assignment happens before expiration (early assignment), the process is the same — it just occurs sooner than you expected.

How do I close a covered call early on E*TRADE before expiration?

Go to your Positions, find the short call, and select 'Buy to Close.' Enter a limit order at or near the current market price of the option. Closing early makes sense if the option has lost most of its value (say 80% of the premium) and you want to free up the shares or reduce risk before a news event.

Does selling covered calls affect the tax treatment of my shares?

It can. Under IRS rules in Publication 550, selling a deep in-the-money covered call may suspend the holding period on your underlying shares, which could affect whether gains are taxed at short-term or long-term rates. Canadian investors should review CRA guidance, as options premiums may be treated as capital gains or business income depending on trading frequency. Always consult a qualified tax advisor for your specific situation.