How to Sell a Covered Call on Charles Schwab Step by Step (And What Options Level You Need)

The Short Answer Before We Dive In

To sell a covered call on Charles Schwab you need options approval at Level 1 (Covered Calls), you must already own at least 100 shares of the underlying stock, and you place the trade using a 'Sell to Open' order on Schwab's StreetSmart Edge platform or the standard web interface. The whole process takes under five minutes once your account is approved. This article walks you through every click, explains the approval process, and shows you a real numbers example so you know exactly what to expect.

What Options Level Does Schwab Require for Covered Calls?

Schwab uses a tiered options approval system. Covered calls sit at Level 1, which is the entry-level tier. That is intentional — regulators and brokers treat covered calls as a relatively conservative strategy because your shares act as collateral. FINRA and the SEC both require brokers to assess a customer's investment experience, financial situation, and risk tolerance before granting options trading privileges. Schwab's application collects exactly that information.

Here is how Schwab's levels stack up in plain terms:

- Level 1: Covered calls and cash-secured puts on stocks you own or have cash to cover. - Level 2: Long calls and puts (buying options). - Level 3: Spreads and combinations. - Level 4: Uncovered (naked) short options — requires significant net worth and experience.

If you already own 100 shares of a stock, you only need Level 1. Most retail investors with a brokerage account and a year or two of investing experience qualify. If Schwab declines your first application, you can reapply after adding more detail about your experience or after a few months of additional trading history.

How to Apply for Options Trading on Schwab

Log in to your Schwab account and navigate to 'Account Settings,' then select 'Options.' Click 'Apply for Options Trading.' Schwab will ask you a short series of questions:

1. Years of investing experience (stocks, bonds, options separately). 2. Number of trades per year. 3. Your stated investment objective — income or growth both work for Level 1. 4. Liquid net worth and annual income ranges. 5. Employment status.

Answer honestly. Schwab's compliance team reviews applications to satisfy FINRA Rule 2360, which governs options account approval standards. Inflating your experience to get a higher level is not worth the risk — and Level 1 is all you need for covered calls anyway.

Approval is often instant for straightforward applications. Sometimes it takes one business day. Once approved, you will see 'Options: Level 1 Approved' in your account settings, and the options trading ticket will become available.

Step-by-Step: Placing Your First Covered Call Order on Schwab

Let's use a real example. Suppose you own 100 shares of Apple (AAPL), currently trading at $213.00. You want to sell one covered call with a strike price of $220, expiring in about 30 days. The bid-ask spread on that contract might show $2.10 bid / $2.20 ask. You decide to set your limit price at $2.15, splitting the spread.

Here is the step-by-step order entry on Schwab's web platform:

**Step 1 — Go to Trade > Options.** From the main navigation bar, click 'Trade,' then select 'Options' from the dropdown.

**Step 2 — Enter the ticker symbol.** Type AAPL in the symbol box and press Enter. Schwab loads the options chain.

**Step 3 — Select your expiration date.** Choose the expiration that is roughly 30 days out. For income traders, the 21-to-45-day window is popular because time decay (theta) accelerates in that range, as documented by the Options Industry Council (OIC).

**Step 4 — Find the $220 strike in the Calls column.** The options chain shows calls on the left and puts on the right (or vice versa depending on your layout). Locate the $220 call row.

**Step 5 — Click 'Sell' on that row.** Schwab auto-populates the order ticket with Action: Sell to Open, Quantity: 1, Type: Call, Strike: 220, Expiration: your chosen date.

**Step 6 — Set order type to Limit.** Always use a limit order, not a market order. Enter your limit price of $2.15. This means you will collect at least $215 in premium per contract (100 shares × $2.15) if the order fills.

**Step 7 — Choose your time in force.** Select 'Day' for a same-day order or 'GTC' (Good Till Canceled) if you want it to stay open. Day orders are cleaner for beginners.

**Step 8 — Review and confirm.** Schwab shows a summary: Sell to Open 1 AAPL Call $220 [expiration] Limit $2.15. Double-check every field. Click 'Review Order,' then 'Place Order.'

**What happens next:** If AAPL stays below $220 at expiration, the option expires worthless and you keep the $215 premium. If AAPL closes above $220, your shares get called away at $220 — you keep the premium plus any gain from your cost basis up to $220. The OIC's covered call resources explain this payoff structure in detail.

Real Numbers: What This Trade Actually Pays

Using the AAPL example above:

- Shares owned: 100 at a cost basis of, say, $190.00 - Current price: $213.00 - Strike sold: $220 call, 30 days out - Premium collected: $2.15 per share = $215 total (before commissions) - Schwab's standard options commission: $0.65 per contract, so net premium ≈ $214.35

**Scenario A — AAPL expires below $220:** You keep $214.35. Your shares are untouched. Annualized yield on the premium alone: ($214.35 / $21,300 stock value) × (365/30) ≈ 12.3% annualized. That is not guaranteed to repeat, but it illustrates the income potential.

**Scenario B — AAPL expires above $220:** Your 100 shares are sold at $220. You collect $22,000 from the sale plus the $214.35 premium. Total proceeds: $22,214.35. Your gain from the $190 cost basis: $3,214.35 on a $19,000 investment, or roughly 16.9% — but you no longer own the shares and miss any further upside above $220.

**Scenario C — AAPL drops sharply to $190:** Your shares lose $2,300 in market value. The $214.35 premium offsets a small portion of that loss. The covered call does not protect you from a large drop — it only reduces your cost basis slightly. This is the core risk.

Risks You Need to Understand Before You Place the Trade

Covered calls are not risk-free. Here are the three risks that matter most:

**1. Capped upside.** Once you sell the call, your maximum gain on the shares is locked at the strike price. If AAPL rockets to $250, you still sell at $220. You gave up $30 per share of upside in exchange for $2.15 in premium. That trade-off is the whole point of the strategy — but it stings in a strong bull market.

**2. Downside is not protected.** The premium you collect is small relative to a big stock drop. If AAPL falls 20%, the $2.15 premium barely moves the needle. You are still a stockholder and you bear full downside risk below your net cost basis.

**3. Early assignment.** American-style options (which most US equity options are) can be exercised by the buyer at any time before expiration. If AAPL jumps sharply and the call goes deep in the money, you could have your shares called away before expiration. The OIC notes this is most likely to happen just before an ex-dividend date. Check the dividend calendar before selling calls on dividend-paying stocks.

FINRA's investor education materials also flag that options trading involves risk and is not suitable for all investors — that is not boilerplate, it is genuinely true for covered calls too.

Tax Treatment: What the IRS (and CRA for Canadians) Says

**US investors:** The IRS treats covered call premium as short-term capital gain in the year the option expires or is closed, regardless of how long you have held the shares. There is an important wrinkle: if you sell a call that is 'in the money' or 'qualified covered call' rules are not met, the IRS may suspend the holding period on your shares for long-term capital gains purposes. IRS Publication 550 covers this in detail. Consult a tax professional before selling calls on shares you are holding for long-term gain treatment.

**Canadian investors:** The CRA generally treats option premiums received as capital gains (50% inclusion rate) when the option expires unexercised, or adjusts the proceeds of disposition if the shares are called away. However, if you trade options frequently, the CRA may characterize the income as business income, taxed at your full marginal rate. CRA Interpretation Bulletin IT-479R addresses transactions in securities. Again, a tax professional familiar with CRA rules is worth consulting.

Quick Tips to Get Your Order Filled Faster

A few practical habits that help retail covered-call sellers on Schwab:

- **Stick to liquid options.** AAPL, MSFT, NVDA, SPY, and QQQ all have tight bid-ask spreads. Thinly traded stocks have wide spreads that eat your premium. - **Use the midpoint as your starting limit price.** Add the bid and ask, divide by two. Start there and adjust if you do not fill within a few minutes. - **Avoid earnings weeks.** Implied volatility spikes before earnings, which inflates premium — but the risk of a big move is also highest. Many experienced traders skip earnings cycles entirely. - **Check open interest.** Higher open interest means more market participants and better fills. The CBOE publishes daily options volume data you can use to gauge liquidity. - **Set a closing target.** Many traders close the position when they have captured 50% of the premium (buy back the call for half of what they sold it for) and redeploy. This frees up the shares and reduces risk in the final days before expiration.

What options level do I need to sell covered calls on Charles Schwab?

You need Level 1 options approval on Schwab, which is the lowest tier. Covered calls are considered a conservative strategy because your existing shares serve as collateral, so most investors with basic experience qualify. Apply through Account Settings > Options on the Schwab website.

Can I sell a covered call on Schwab if I only own 100 shares?

Yes. One options contract covers exactly 100 shares, so 100 shares is the minimum required to sell one covered call. If you own 200 shares you can sell up to two contracts, and so on. You cannot sell a covered call on fewer than 100 shares.

How long does Schwab options approval take?

Approval for Level 1 is often instant or within one business day for straightforward applications. Schwab reviews your stated experience, net worth, and investment objectives to comply with FINRA Rule 2360. If you are declined, you can reapply after adding more detail about your investing background.

What happens if my covered call gets exercised early on Schwab?

If the buyer exercises the call early, Schwab will automatically sell your 100 shares at the strike price and deposit the proceeds in your account. You keep the premium you already collected. Early exercise is most common when the call is deep in the money or just before an ex-dividend date, as noted by the Options Industry Council.

Should I use a market order or limit order when selling a covered call on Schwab?

Always use a limit order. Options spreads can be wide, and a market order may fill at the bid price, costing you meaningful premium. Start your limit at the midpoint of the bid-ask spread and adjust slightly lower if you need a faster fill.

Is the premium I collect from a covered call taxed as ordinary income?

In the US, the IRS generally treats expired or closed covered call premiums as short-term capital gains, not ordinary income, reported in the year the position closes. However, selling certain in-the-money calls can suspend the long-term holding period on your shares — IRS Publication 550 has the details. Canadian investors should review CRA Interpretation Bulletin IT-479R, as frequent options activity may be taxed as business income.