How to Place a Covered Call Order on E*TRADE: A First-Timer's Step-by-Step Guide

The Short Answer: What You Need and How Long It Takes

You can place a covered call order on E*TRADE in about five minutes once your account is approved for options trading. You need to already own at least 100 shares of the stock you want to write the call on, and your account needs at least Level 1 options approval. That's it — no special account type, no margin required for a standard covered call.

Step 1 — Get Options Approval on E*TRADE

Before you can sell any option, E*TRADE has to approve you. Log in, go to Account > Settings > Options Trading, and click Apply. You'll answer questions about your investing experience, income, net worth, and risk tolerance. FINRA Rule 2360 requires brokers to collect this information before granting options privileges.

For covered calls you need Level 1 (sometimes called 'Covered Calls' tier). E*TRADE may approve you instantly or ask for a few business days of review. If you already own shares and just haven't activated options, this is the only gate between you and your first trade.

One tip: answer the experience questions honestly. Overstating experience to get a higher approval level can expose you to strategies you're not ready for and may create compliance issues down the road.

Step 2 — Confirm You Own 100 Shares (The Coverage Requirement)

A single standard equity options contract covers exactly 100 shares. If you own 250 shares of Apple (AAPL), you can sell a maximum of two covered call contracts — covering 200 shares — and the remaining 50 shares stay uncovered. Selling a call without owning the underlying shares turns it into a naked call, which requires much higher approval levels and carries theoretically unlimited risk. The Options Industry Council (OIC) defines a covered call specifically as one where the seller holds the underlying shares as collateral.

Check your E*TRADE portfolio page and confirm your share count before you move to the order ticket.

Step 3 — Find the Options Chain and Pick Your Strike and Expiration

Here's a worked example using real numbers. Suppose you own 100 shares of Apple (AAPL) and the stock is trading at $213.50. You want to generate some income without giving up the stock unless it rallies sharply.

On E*TRADE, navigate to the stock's quote page and click the 'Options' tab. You'll see an options chain — a grid of calls (left side) and puts (right side) sorted by strike price, with different expiration dates selectable at the top.

Choose an expiration. Most first-timers start with options expiring in 30–45 days. Shorter expirations mean you collect premium more frequently but have to manage the position more often. Longer expirations mean more premium per trade but your shares are 'locked up' longer.

Choose a strike price. For a conservative first trade, look at strikes that are out of the money (OTM) — above the current stock price. In our AAPL example at $213.50, the $220 strike expiring in about 35 days might show a bid of $2.10 and an ask of $2.20 per share. Since one contract = 100 shares, selling one contract at the $2.15 midpoint would bring in $215 in premium before commissions.

The delta on that $220 strike might be around 0.28, meaning the market is pricing roughly a 28% chance the stock closes above $220 at expiration. Lower delta = lower premium but lower chance of assignment. Higher delta = more premium but higher chance your shares get called away.

Step 4 — Place the Order on E*TRADE's Order Ticket

From the options chain, click the Bid price in the Calls column next to your chosen strike. E*TRADE will pre-populate an order ticket. Here's what each field means and what to enter:

Action: Select 'Sell to Open.' This is the correct action for initiating a new short option position. 'Sell to Close' is only for closing a position you already bought.

Contracts: Enter 1 (for 100 shares covered). If you own 200 shares, you could enter 2.

Expiration: Confirm the date you selected from the chain.

Strike: Confirm — in our example, $220.

Order Type: Start with a Limit order, not a Market order. Options can have wide bid-ask spreads, and a market order may fill at an unfavorable price. Set your limit price at or near the midpoint of the bid-ask spread. In our AAPL example, bid $2.10 / ask $2.20 — try a limit of $2.15.

Timing: 'Day' is fine for liquid names like AAPL. If it doesn't fill, you can re-evaluate and adjust.

Review the order summary. E*TRADE will show your maximum gain (the premium collected), the fact that your upside is capped at the strike, and the margin/collateral being held. Click 'Preview Order,' then 'Place Order.' You'll receive a confirmation with a fill price once the order executes.

What Are the Real Risks? Read This Before You Trade

Covered calls are considered one of the more conservative options strategies, but they carry genuine risks that every first-timer should understand before placing a trade.

Capped upside: If AAPL rockets from $213.50 to $240 before expiration, you still sell at $220 (your strike). You keep the $215 premium, but you miss $2,650 in additional gains on 100 shares. That opportunity cost is real.

Assignment: If AAPL closes above $220 at expiration, the buyer of your call has the right to 'call away' your 100 shares at $220. E*TRADE will automatically sell your shares at that price. You keep the premium plus the gain from $213.50 to $220, but you no longer own the stock. The OIC notes that American-style equity options (which most US stocks use) can be exercised at any time before expiration, not just at expiration.

Stock still falls: The premium you collected ($215 in our example) provides only a small cushion. If AAPL drops to $190, you've lost roughly $2,350 on the stock position, partially offset by the $215 premium. The covered call does not protect you from a large decline.

Early assignment risk: Dividend-paying stocks carry extra risk around ex-dividend dates. A call buyer may exercise early to capture the dividend, triggering assignment before you expected it.

FINRA and the SEC both require brokers to provide options disclosure documents before you trade. E*TRADE will send you the OCC's 'Characteristics and Risks of Standardized Options' document — read it.

Tax Basics: What Happens to Your Premium and Your Shares

In the United States, the IRS treats premium received from selling a covered call as short-term capital gain in most cases, reported in the tax year the position closes (either expires, is bought back, or results in assignment). If your shares get called away, the premium is added to the proceeds of the stock sale for tax purposes, which can affect whether the gain on the stock is short-term or long-term. Importantly, selling a covered call that is 'in the money' or 'qualified covered call' rules under IRS Section 1092 can suspend the holding period on your shares — meaning a long-term holding could lose its long-term status. Consult a tax professional if this matters to your situation.

Canadian investors using a Canadian brokerage should note that the CRA treats option premiums as capital gains or income depending on the frequency of trading and intent — the CRA's Interpretation Bulletin IT-479R covers this in detail. If you're trading in a TFSA, be aware the CRA has challenged aggressive options trading inside registered accounts.

Keep records of every trade: entry date, premium received, expiration or close date, and any assignment details. E*TRADE's tax documents (1099-B for US accounts) will include this, but your own records are a useful backup.

Managing the Position After You're In

Once your covered call is open, you have three likely outcomes: it expires worthless (you keep the premium and your shares, and can sell another call), it gets assigned (your shares are sold at the strike), or you buy it back early.

Buying back early — called 'buying to close' — is a common technique. If the stock drops and the option loses most of its value, say the $220 call drops from $2.15 to $0.30, you can buy it back for $30 and lock in most of your profit while freeing up your shares to sell another call at a lower strike or a new expiration. This is called 'rolling' when you simultaneously close the old call and open a new one.

E*TRADE's Power E*TRADE platform has a 'roll' order type that lets you do this in a single ticket, which reduces execution risk compared to two separate orders.

Set a mental or hard stop: many experienced covered-call writers buy back a short call if it reaches 200% of the premium received (i.e., if you sold for $2.15 and it's now trading at $4.30, that's a signal the stock is moving hard against you and assignment is likely). This is a risk-management rule of thumb, not a guarantee.

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

You need Level 1 options approval on E*TRADE, which is the entry-level tier specifically designed for covered calls. During the application, E*TRADE will ask about your experience and financial situation as required by FINRA. Most applicants who already own stocks are approved at this level quickly.

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

Yes, E*TRADE allows covered calls in Traditional and Roth IRA accounts at Level 1 approval. Because IRAs are cash accounts, you cannot sell naked calls, but covered calls are permitted since the shares serve as collateral. Tax treatment inside an IRA differs from a taxable account — consult the IRS guidelines or a tax advisor for specifics.

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

If the stock closes above your strike at expiration, E*TRADE will automatically sell your 100 shares at the strike price and credit your account. You keep the premium you collected plus any gain from your purchase price to the strike. You no longer own the shares after assignment.

How do I pick the right strike price for my first covered call?

Most first-timers choose an out-of-the-money strike 3–7% above the current stock price, balancing meaningful premium against a reasonable buffer before assignment. Looking at the delta column in the options chain is a quick guide — a delta of 0.20 to 0.30 means roughly a 20–30% probability of finishing in the money. The OIC's free education tools walk through strike selection in detail.

What is the bid-ask spread and why does it matter when I place my order?

The bid is the highest price a buyer will pay for the option; the ask is the lowest price a seller will accept. For a covered call, you are the seller, so you want to fill as close to the ask as possible. Using a limit order near the midpoint of the spread — rather than a market order — helps you avoid giving away money on the fill, especially in less liquid options.

How much money can I realistically make selling covered calls each month?

Returns vary widely by stock volatility, strike selection, and market conditions. On a stock like AAPL trading near $213, a 35-day slightly out-of-the-money call might generate $150–$250 per 100 shares, roughly 0.7–1.2% of the stock's value. Annualized that's roughly 8–14%, but that assumes consistent conditions and ignores the risk that the stock drops or gets called away — neither of which is guaranteed.