How to Sell Covered Calls on Charles Schwab: A Step-by-Step Guide

The Short Answer: Yes, Schwab Supports Covered Calls

You can sell covered calls directly inside a Charles Schwab brokerage account — including a standard taxable account, an IRA, or a Schwab One account — once you have options Level 1 approval. The process takes about five minutes once you own at least 100 shares of the underlying stock. This guide walks you through every click, plus a real-dollar example so you know exactly what to expect.

What You Need Before You Place the Trade

Three things must be in place before Schwab will let you sell a covered call.

First, you need at least 100 shares of the stock in your account. One standard options contract covers exactly 100 shares. If you own 250 shares, you can sell up to two contracts and still be fully covered.

Second, you need options trading approval. Schwab uses a tiered approval system. Covered calls fall under Level 1 — the most basic tier. To apply, log in, go to Account > Upgrade Features > Apply for Options, and complete the short questionnaire. Schwab asks about your investing experience, net worth, and income. The Options Industry Council (OIC) notes that brokers are required by FINRA rules to assess suitability before granting options access, so answer honestly. Most investors with a few years of stock experience are approved for Level 1 within one business day.

Third, make sure your account is not flagged as a Pattern Day Trader account with insufficient equity, and that the shares you own are fully settled and not on loan in a margin short-sale. If your shares are already pledged as collateral for a margin debit, Schwab may require you to hold additional equity.

Step-by-Step: Placing a Covered Call Order on Schwab

The walkthrough below uses Schwab's web platform at schwab.com. The mobile app and StreetSmart Edge desktop platform follow the same logic.

**Step 1 — Find the options chain.** Search for your stock ticker in the top search bar. On the stock's quote page, click the Trade button, then select Options.

**Step 2 — Select expiration and strike.** The options chain displays calls on the left and puts on the right. Choose an expiration date from the dropdown — most covered-call sellers start with 30-45 days to expiration (DTE) to capture the fastest time-decay window. Then find the strike price row you want.

**Step 3 — Set up the order ticket.** Click the Ask price of the call you want to sell. Schwab auto-populates an order ticket. Confirm these fields: - Action: Sell to Open - Quantity: number of contracts (1 contract = 100 shares) - Order type: Limit (always use a limit order, not market) - Price: set at or near the current bid/ask midpoint - Position effect: Opening

**Step 4 — Review and confirm.** Schwab shows a confirmation screen with the maximum gain, the breakeven price, and the margin/buying-power impact. Read it. Then click Confirm and Send.

**Step 5 — Monitor the position.** Go to Positions to see your open call. You can close it early by placing a Buy to Close order at any time before expiration.

Worked Example: Selling a Covered Call on AAPL

Let's say you own 100 shares of Apple (AAPL) purchased at $185 per share. AAPL is currently trading at $213.

You open the options chain and look at the expiration 35 days out. The $220 strike call — roughly 3.3% above the current price — shows a bid of $2.40 and an ask of $2.55. You place a Sell to Open limit order for 1 contract at $2.48 (the midpoint). Your order fills, and $248 in premium lands in your account immediately.

Here is what each outcome looks like at expiration:

**Scenario A — AAPL stays below $220.** The call expires worthless. You keep the $248 premium, you still own your 100 shares, and you can sell another call next month. Annualized, this kind of trade can generate 12–18% in additional income on top of any dividends, depending on volatility.

**Scenario B — AAPL closes above $220.** Your shares get called away at $220. You receive $22,000 for the shares plus the $248 premium you already collected. Your total proceeds are $22,248. Since you paid $185 per share ($18,500), your profit on the stock is $3,500, plus $248 in premium — a total gain of $3,748. The trade-off: you miss any upside above $220.

**Scenario C — AAPL drops sharply.** The premium you collected ($248) cushions the loss but does not eliminate it. If AAPL falls to $195, you are down $1,800 on the stock but up $248 on the call, for a net loss of $1,552. The call does not protect you below your purchase price. This is the core risk of covered calls.

The Real Risks — Read This Before You Trade

Covered calls are considered a conservative options strategy, but they carry real risks that every seller must understand before placing the first trade.

**Capped upside.** Once you sell the call, your profit on the stock is capped at the strike price. If AAPL rockets from $213 to $250, you only receive $220 per share. You gave up $30 per share of gains in exchange for $2.48 in premium. That is a bad trade in hindsight, even though it was reasonable at the time.

**Assignment risk.** The buyer of your call can exercise it at any time before expiration (American-style options). Early assignment is rare but it does happen, especially the day before an ex-dividend date. If you are assigned early, Schwab will automatically sell your shares at the strike price. The OIC publishes detailed guidance on early assignment mechanics — it is worth reading before your first trade.

**Downside is not protected.** A covered call reduces your cost basis by the premium received, but it does not hedge a major stock decline. If the stock falls 30%, the small premium you collected barely moves the needle.

**Tax consequences.** The IRS treats covered-call premiums as short-term capital gains in most cases, regardless of how long you have held the stock. Selling a deep in-the-money call can also suspend the holding period on your shares under IRS qualified covered call rules (see IRS Publication 550). Canadian investors should consult CRA guidance, as premiums may be treated as capital gains or income depending on the frequency of trading. Neither Schwab nor this article provides tax advice — speak with a tax professional.

Schwab-Specific Settings Worth Knowing

A few Schwab platform details will save you time and prevent errors.

**Good-til-canceled vs. day orders.** Schwab defaults to Day orders on options. If your limit price is not filled by market close, the order cancels. If you want the order to stay open, change the time-in-force to Good-til-Canceled (GTC), which keeps it active for up to 60 days.

**StreetSmart Edge for active traders.** If you plan to sell covered calls regularly, Schwab's StreetSmart Edge desktop platform gives you a live options chain with Greeks (delta, theta, implied volatility) displayed in real time. Delta is especially useful: a call with a delta of 0.20–0.30 is a common starting point for covered-call sellers who want a balance between premium income and the probability of keeping their shares.

**Covered calls in an IRA.** Schwab allows covered calls inside Traditional and Roth IRAs at Level 1. Because IRAs are tax-advantaged accounts, the premium you collect is not immediately taxable — it grows inside the account. The SEC has noted that options in retirement accounts require the same suitability review as taxable accounts, so the approval process is identical.

**Automatic exercise at expiration.** CBOE rules state that options that are $0.01 or more in-the-money at expiration are automatically exercised. If your call is even slightly in-the-money at 4:00 PM ET on expiration Friday, expect your shares to be called away. You can submit a Do Not Exercise notice through Schwab before the cutoff, but this is an advanced move — most traders simply close the position before expiration if they want to keep their shares.

How to Choose a Strike Price and Expiration

The two decisions that drive your income and your risk are the strike price and the expiration date.

**Strike price.** Selling a call that is out-of-the-money (OTM) — above the current stock price — gives the stock room to rise before you lose your shares. A strike 3–7% above the current price is a common starting range. The further out-of-the-money you go, the lower the premium but the higher the chance you keep your shares. Selling at-the-money (ATM) generates more premium but means any upward move triggers assignment.

**Expiration date.** Options lose time value fastest in the final 30–45 days before expiration — a concept called theta decay. Most covered-call sellers target this window. Going out 60–90 days collects more total premium but ties up your shares longer and gives the stock more time to make a big move in either direction.

**Implied volatility matters.** When a stock's implied volatility (IV) is elevated — for example, heading into an earnings announcement — call premiums are higher. Selling into high IV can boost your income. But be careful: earnings can cause large price swings that wipe out the premium and then some. Many experienced covered-call sellers avoid holding short calls through earnings unless they are comfortable with the assignment risk.

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

Covered calls require Level 1 options approval at Charles Schwab, which is the entry-level tier. You apply through the Account settings under Upgrade Features, and most applicants with basic investing experience are approved within one business day. FINRA rules require Schwab to verify your suitability before granting access, so you will answer a short questionnaire about your experience and finances.

Can I sell covered calls in a Schwab IRA?

Yes, Schwab permits covered calls inside both Traditional and Roth IRAs at Level 1 approval. The premium you collect stays inside the tax-advantaged account and is not immediately taxable. The SEC requires the same suitability review for retirement accounts as for taxable accounts, so you still need to apply for options approval on the IRA separately.

What happens if my covered call gets assigned on Schwab?

If your call is exercised, Schwab automatically sells your 100 shares per contract at the strike price and credits your account. You keep the premium you collected when you sold the call. Early assignment before expiration is uncommon but can happen, particularly the day before an ex-dividend date on the underlying stock.

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

Always use a limit order. Options spreads can be wide, and a market order may fill at the bid — the lowest price — instead of near the midpoint. Set your limit price at the midpoint between the bid and ask, and adjust slightly if the order does not fill within a few minutes.

How are covered call premiums taxed in the US?

The IRS generally treats covered-call premiums as short-term capital gains, taxed at ordinary income rates, in the year the position closes. Selling a deep in-the-money call can also affect the holding period of your underlying shares under IRS qualified covered call rules outlined in IRS Publication 550. Consult a tax professional for advice specific to your situation.

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

Go to your Positions tab, find the open short call, and place a Buy to Close order for the same contract. If the stock has not moved much and time has passed, the call will likely be worth less than what you sold it for, letting you buy it back at a profit and free up your shares. Many traders close at 50% of the original premium received as a rule of thumb to lock in gains and redeploy capital.