How to Sell Covered Calls on tastytrade: Options Level, Setup, and a Real Trade Example

The Short Answer: Level 1 Is All You Need

To sell covered calls on tastytrade, you need Options Level 1 approval — the entry-level tier that tastytrade grants to most accounts after a short application. You do not need margin, Level 2, or any advanced permissions. As long as you own at least 100 shares of the underlying stock, you can sell one covered call against those shares starting on day one.

tastytrade (formerly tastyworks) structures its approval tiers so that covered calls sit at the lowest rung because the risk is capped by the shares you already hold. The Options Industry Council (OIC) defines a covered call the same way: a short call position fully collateralized by 100 long shares per contract. That collateral is what makes Level 1 sufficient.

What Does tastytrade's Options Level 1 Actually Allow?

tastytrade uses a tiered approval system. Level 1 covers defined-risk strategies where your existing stock acts as the collateral. Specifically, Level 1 lets you:

• Sell covered calls (short call + long 100 shares) • Buy protective puts on stock you own • Sell cash-secured puts (requires enough cash to buy the shares)

Level 2 adds long calls and puts. Level 3 adds spreads. You do not need any of those to run a covered-call income strategy. FINRA Rule 2360 requires brokers to collect basic financial information before granting options trading, so tastytrade will ask about your income, net worth, trading experience, and investment objectives during the application. Answer honestly — the review usually takes less than one business day.

How to Apply for Options Trading on tastytrade (Step by Step)

1. Open or log in to your tastytrade account at tastytrade.com. 2. Go to Settings → Account → Upgrade Options Level. 3. Complete the options application. tastytrade asks about years of experience, estimated trades per year, and your primary goal (income, speculation, hedging). Select 'Income' if covered calls are your focus. 4. Submit. Most retail applicants receive Level 1 approval within 24 hours. 5. Once approved, fund the account and transfer or purchase at least 100 shares of the stock you want to write calls against.

If you are opening a new account, tastytrade requires identity verification under SEC and FINRA anti-money-laundering rules before you can trade anything. Have your Social Security Number (or Social Insurance Number if you are a Canadian resident using a cross-listed account) ready.

A Real Covered-Call Trade on tastytrade: AAPL Example

Let's walk through an actual trade setup using Apple (AAPL).

Assume AAPL is trading at $213.50 per share. You own 100 shares, so your position is worth roughly $21,350. You want to generate monthly income without giving up your shares at a price you would regret.

Step 1 — Choose your strike. You decide to sell the $220 call expiring in 30 days. That strike is about 3% out of the money (OTM). The delta on this call is approximately 0.28, meaning the market is pricing in roughly a 28% chance AAPL closes above $220 at expiration. A lower delta = lower premium but less assignment risk. A higher delta = more premium but higher chance your shares get called away.

Step 2 — Check the premium. The $220 call is quoted at $2.85 bid / $2.90 ask. You enter a limit order to sell at $2.87 (the midpoint). One contract covers 100 shares, so you collect $287 in premium, minus tastytrade's commission (tastytrade charges $1 per contract to open, $0 to close, capped at $10 per leg on stock options as of 2024).

Step 3 — Place the order on tastytrade. Click the ask price on the options chain to pre-populate a sell order. Change the order type to Limit, set the price to $2.87, select 'Day' or 'GTC', and confirm. The platform shows your buying-power effect — for a covered call it should be $0 or minimal because your shares are the collateral.

Step 4 — Manage the trade. If AAPL stays below $220 at expiration, the call expires worthless and you keep the full $287. If AAPL climbs above $220, you may be assigned — meaning your 100 shares are sold at $220. Your effective sale price is $220 + $2.87 = $222.87, which is still a gain from $213.50. tastytrade auto-exercises in-the-money options at expiration per OCC rules, so you do not need to do anything manually.

Annualized yield on this trade: ($287 ÷ $21,350) × 12 months ≈ 16.1% gross before taxes and commissions. Real results vary with volatility and strike selection.

Risks You Need to Understand Before You Sell Your First Call

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

Capped upside: Once you sell the $220 call, your profit on AAPL above $220 belongs to the buyer, not you. If AAPL jumps to $240 on an earnings beat, you still sell at $222.87 effective. You miss $17.13 per share of that move. This is the core trade-off — you exchange upside potential for immediate income.

Stock still falls: The $287 premium gives you a small cushion, but if AAPL drops from $213.50 to $190, you lose roughly $23.50 per share minus the $2.87 premium = $20.63 per share net loss. The covered call does not protect you from a large decline. The OIC is explicit on this point: a covered call reduces cost basis but is not a hedge against a significant drop.

Early assignment: American-style equity options (which AAPL options are) can be exercised by the buyer at any time before expiration. Early assignment is rare but more likely when the call goes deep in the money or just before an ex-dividend date. If you are assigned early, tastytrade will notify you and your shares will be sold at the strike price. FINRA rules require your broker to settle the transaction within the standard T+1 cycle.

Tax treatment: In the US, premium received from selling a covered call is generally not taxed until the position closes. If the call expires worthless, the premium is a short-term capital gain regardless of how long you held the stock, per IRS Publication 550. If the call is exercised and your shares are sold, the premium is added to the sale proceeds. Canadian investors should consult CRA guidance on options income, as treatment can differ depending on whether you are classified as a trader or investor.

Three Settings in tastytrade That Make Covered Calls Easier

tastytrade has a few platform features worth knowing before you place your first trade.

Positions page P&L toggle: Switch between 'Day P&L' and 'Total P&L' to see how your covered call is performing relative to your stock cost basis. This helps you decide whether to close the call early for a profit or roll it out to the next expiration.

Roll function: tastytrade has a one-click 'Roll' button that closes your current short call and opens a new one at a later expiration in a single order. Rolling is a common management technique when the call is near expiration and still has time value left, or when you want to move the strike higher after a stock rally.

Notifications: Set a price alert on the underlying stock so you get a push notification if AAPL approaches your strike. This gives you time to decide whether to close the call, roll it, or let assignment happen — rather than being surprised.

Common Beginner Mistakes to Avoid on tastytrade

Selling calls on stocks you do not want to sell: If you have a strong conviction that AAPL will run 20% this quarter, selling a covered call caps that gain. Only write calls on positions where you are comfortable selling at the strike price.

Chasing high premium on volatile stocks: A call paying $8 on a $50 biotech stock looks attractive until the stock gaps down 40% on news. Stick to liquid, large-cap names — AAPL, MSFT, NVDA, SPY — where bid-ask spreads are tight and the underlying is less likely to crater overnight.

Ignoring ex-dividend dates: If your stock pays a dividend and your short call is in the money, the buyer may exercise early to capture the dividend. Check the ex-dividend date before selling a call that expires after it.

Selling too close to earnings: Implied volatility spikes before earnings, which inflates premiums — but the stock can move 10-15% in either direction after the report. Many experienced covered-call writers avoid selling calls that span an earnings announcement, or they close the position before the report.

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

You need Options Level 1, which is the lowest tier tastytrade offers. Level 1 is available to most retail applicants after completing the options approval questionnaire. You do not need margin or any higher approval level to sell covered calls.

How long does tastytrade options approval take?

Most applications are reviewed within one business day, and many are approved within a few hours. tastytrade may ask for additional documentation if your application raises questions under FINRA suitability rules. Once approved, the options trading permission is added to your account automatically.

Can I sell covered calls in a tastytrade IRA?

Yes. tastytrade supports covered calls in Traditional and Roth IRA accounts at Level 1. Because IRAs cannot use margin, the covered call must be fully collateralized by 100 shares you already hold in the account. Tax-deferred or tax-free growth in an IRA also means the premium income is not taxed in the year received, per IRS rules on retirement accounts.

What happens if my covered call gets assigned on tastytrade?

If the call buyer exercises the option, tastytrade will automatically sell your 100 shares at the strike price. You keep the premium you collected plus any gain from your purchase price to the strike. tastytrade sends an assignment notice and the shares are removed from your account on the next settlement date under standard T+1 rules.

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

Go to your Positions page, find the short call, and click to create a closing buy-to-close order. Set a limit price at or near the current ask. tastytrade charges $0 commission to close single-leg options, so closing early to lock in a profit or cut a loss costs you nothing extra beyond the spread.

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

In the US, covered-call premium is generally treated as a short-term capital gain when the position closes, not as ordinary income, per IRS Publication 550. If the call expires worthless, the gain is recognized at expiration. Canadian investors should review CRA guidance, as the tax treatment depends on whether options activity is considered business income or capital gains.