How to Sell a Covered Call on Robinhood for the First Time: A Step-by-Step Guide

The Short Answer: Yes, You Can Do This in About Five Minutes

Selling a covered call on Robinhood means you sell someone the right to buy 100 shares of stock you already own, at a price you choose, by a date you choose — and you collect cash upfront for doing it. Robinhood supports covered calls once you are approved for Level 2 options trading, which most accounts can reach after a short application inside the app. This guide walks you through every click, explains the real risks, and shows you a worked example using Apple (AAPL) so you know exactly what to expect before you place your first trade.

What You Need Before You Place the Trade

Three things must be true before Robinhood will let you sell a covered call.

First, you need at least 100 shares of the underlying stock in your Robinhood account. One standard options contract covers exactly 100 shares. If you own 250 shares of AAPL, you can sell up to two contracts and still have 50 shares uncovered.

Second, you need Level 2 options approval. Robinhood's application asks about your investing experience, income, net worth, and risk tolerance. FINRA rules require brokers to collect this information before allowing customers to trade options. The process takes a few minutes and approval usually comes within one business day.

Third, your account must not be flagged as a Pattern Day Trader (PDT) with a balance under $25,000 if you plan to open and close positions the same day. For most covered-call sellers who hold through expiration, PDT is not a concern. The SEC defines a pattern day trader as anyone who executes four or more day trades in five business days in a margin account.

The Real Risks — Read This Before You Click Anything

Covered calls are considered one of the most conservative options strategies, but they carry two risks every first-timer must understand.

Risk 1 — You can be forced to sell your shares. If the stock closes above your strike price at expiration, the buyer will almost certainly exercise the contract. Robinhood will automatically sell your 100 shares at the strike price. This is called assignment. You keep the premium you collected, but you no longer own those shares. If the stock has risen well above your strike, you miss out on those extra gains. The Options Industry Council (OIC) calls this "opportunity cost" and it is the primary trade-off of the strategy.

Risk 2 — The premium does not fully protect you from a stock drop. If AAPL falls from $210 to $185, a $3.00 premium you collected only offsets $3.00 of that $25 loss. You still hold the stock and absorb the rest of the decline. Covered calls reduce your cost basis slightly; they do not hedge a large drawdown.

A third, smaller risk: early assignment. American-style options — which is what you trade on Robinhood — can be exercised by the buyer at any time before expiration, not just on the last day. Early assignment is rare but more likely right before an ex-dividend date. The OIC recommends checking the dividend calendar before selling calls on dividend-paying stocks.

Worked Example: Selling One AAPL Covered Call

Let's say you own 100 shares of Apple (AAPL) and the stock is trading at $210.00.

You decide to sell one out-of-the-money (OTM) covered call with a strike price of $215, expiring in 21 days. The bid/ask on that contract is $2.80 / $3.10. You place a limit order to sell at $2.95 — the midpoint — and the order fills.

Here is what happens next:

• You immediately receive $295.00 in your account (100 shares × $2.95 premium). Robinhood credits this the same day. • Your 100 AAPL shares are now "locked" as collateral. You cannot sell them without first buying back the call. • Scenario A — AAPL stays below $215 at expiration: The contract expires worthless. You keep the $295 and still own your shares. Your effective cost basis on the shares dropped by $2.95 per share. • Scenario B — AAPL closes at $218 at expiration: The buyer exercises. Robinhood sells your 100 shares at $215. You receive $21,500 for the shares plus the $295 premium you already collected — a total of $21,795. You miss the extra $3 per share above $215, which equals $300 of foregone upside. • Scenario C — AAPL drops to $195: You still own the shares at a loss. The $295 premium reduces your effective loss from $1,500 to $1,205, but it does not eliminate it.

Annualized yield on the premium alone: $295 collected over 21 days on a $21,000 position equals roughly 1.4% for the period, or about 24% annualized if you could repeat it every 21 days — which is not guaranteed and depends entirely on market conditions and volatility.

Step-by-Step: Placing the Trade Inside Robinhood

Step 1 — Open the stock's detail page. Search for the ticker (for example, AAPL) in the Robinhood app or web platform and tap the stock.

Step 2 — Tap "Trade," then "Trade Options." This opens the options chain.

Step 3 — Select "Sell" and then "Call." Robinhood will automatically filter to show only covered call strikes because you own the shares. If you do not own 100 shares, this option will not appear.

Step 4 — Choose your expiration date. Most first-time sellers start with 21 to 45 days to expiration (DTE). This range tends to offer a reasonable balance between premium collected and time for the trade to play out. The CBOE notes that options lose time value fastest in the final 30 days — a concept called theta decay — which generally works in the seller's favor.

Step 5 — Choose your strike price. An out-of-the-money strike (above the current stock price) gives you some room for the stock to rise before you face assignment. A common starting point is a strike with a delta around 0.20 to 0.30, meaning the market implies roughly a 20–30% chance of finishing in the money.

Step 6 — Review the premium. Robinhood shows the bid, ask, and mark price. Place a limit order at the midpoint or slightly below the mark to improve your fill price. Avoid market orders on options — the spreads can be wide.

Step 7 — Confirm and submit. Robinhood shows a plain-language summary of the trade before you confirm. Read it. It will tell you the maximum profit (the premium), the break-even price, and what happens at expiration.

Step 8 — Manage the trade. You can buy the call back at any time to close the position early. Many experienced sellers close when the call has lost 50–80% of its value, then sell a new one — a process called "rolling."

Tax Treatment: What Robinhood Reports and What You Owe

The IRS treats premium income from covered calls as short-term capital gain in most cases, regardless of how long you have held the underlying shares. This is reported on a 1099-B that Robinhood sends you by mid-February each year.

There is an important wrinkle: selling a covered call can suspend the holding period on your shares if the call is "in the money" when you sell it. IRS Publication 550 covers this in detail. If you are trying to qualify your shares for long-term capital gains treatment (held more than one year), selling a deep in-the-money call could reset your holding period clock. Out-of-the-money calls generally do not trigger this rule, but consult a tax professional if you are close to the one-year mark.

For Canadian investors using a broker that supports covered calls: the Canada Revenue Agency (CRA) treats option premiums as capital gains or income depending on whether you are considered a trader or an investor. CRA Interpretation Bulletin IT-479R provides guidance. Covered calls inside a TFSA or RRSP have specific restrictions — the CRA does not allow "writing" options as a business inside registered accounts in most cases.

Robinhood is currently available only to US residents, so CRA rules apply if you use a Canadian broker with a similar interface, such as Questrade or Wealthsimple Trade.

Common Mistakes First-Time Sellers Make on Robinhood

Selling calls on stocks you want to keep long-term. If you love AAPL and plan to hold it for years, selling calls near the current price puts those shares at constant assignment risk. Either sell calls well out of the money or choose a stock you are comfortable selling.

Chasing high premium without checking earnings dates. A call expiring the day after an earnings announcement will carry inflated premium — but the stock can move 10% or more in either direction. FINRA warns retail investors to understand the events that drive options pricing before trading around them.

Using market orders. Options spreads on Robinhood can be $0.10 to $0.50 wide. Always use a limit order.

Forgetting about assignment over a weekend. If your call is in the money on Friday afternoon, you can be assigned over the weekend. Check your positions every Thursday if you are near expiration.

Selling too many contracts. If you own 300 shares and sell three contracts, all 300 shares are locked. Leave yourself some uncovered shares if you might need liquidity.

Do I need margin to sell a covered call on Robinhood?

No. A covered call is secured by the 100 shares you already own, so no margin is required. Robinhood holds your shares as collateral for the duration of the trade. This is one reason covered calls are approved at Level 2, while naked calls require much higher approval levels.

What happens if I sell a covered call and the stock shoots up?

If the stock closes above your strike price at expiration, your shares will be called away at the strike price — this is called assignment. You keep the premium you collected, but you miss any gains above the strike. For example, if you sold a $215 AAPL call and AAPL closes at $225, you sell at $215 and miss the extra $10 per share.

How much money can I realistically make selling covered calls on Robinhood?

Premium income varies with the stock's volatility, the strike you choose, and how much time is left on the contract. On a $20,000 stock position, a 21-day out-of-the-money call might generate $150 to $400 per contract in a normal volatility environment. Annualized, consistent sellers often target 12–24% in additional income, but results depend heavily on market conditions and whether shares get called away.

Can I sell a covered call on Robinhood if I only own 50 shares?

No. One standard options contract covers exactly 100 shares, and Robinhood requires you to own all 100 shares before it will let you sell a covered call. You would need to buy at least 50 more shares first. Mini options covering 10 shares exist on some platforms but are not available on Robinhood.

How do I close a covered call early on Robinhood before expiration?

Go to your open positions, select the call contract, and choose "Buy to Close." You will pay the current market price to buy back the contract, which cancels your obligation. If the stock has not moved much or has dropped, the call will be cheaper than what you sold it for, and you pocket the difference as profit.

Does selling a covered call affect my taxes on the shares I own?

It can. The IRS states in Publication 550 that selling an in-the-money covered call may suspend or reset the holding period on your shares, which could affect whether gains are taxed at short-term or long-term rates. Out-of-the-money calls generally do not trigger this rule, but you should review your specific situation with a tax professional, especially if you are close to the one-year holding mark.