How to Sell a Covered Call on E*TRADE: Step-by-Step Guide for Retail Traders

The Short Answer: Three Clicks and a Confirmation

To sell a covered call on E*TRADE, log in, open the options chain for a stock you already own at least 100 shares of, select a strike price and expiration, then enter a Sell to Open order for one contract. E*TRADE routes the order, collects the premium into your account, and places a hold on your 100 shares as collateral. The whole process takes under five minutes once your account has options approval.

The rest of this guide walks through every step in detail, shows you a real dollar example using Apple (AAPL), and flags the risks you need to understand before you place your first trade.

What You Need Before You Start

You need three things in place before E*TRADE will let you sell a covered call.

**At least 100 shares of the underlying stock.** One standard options contract covers exactly 100 shares. If you own 250 shares of AAPL, you can sell a maximum of two contracts (covering 200 shares) and leave 50 shares uncovered.

**Options Level 1 approval (covered calls).** E*TRADE assigns options trading levels based on your application. Covered calls are the most basic strategy and fall under Level 1. You apply inside your account under Options > Apply for Options Trading. FINRA Rule 2360 requires brokers to collect information about your experience, net worth, and investment objectives before granting options access, so be honest and thorough on the application — it speeds approval.

**A margin or standard brokerage account.** Covered calls can be sold in a standard (cash) account, a margin account, or a tax-advantaged account like an IRA, depending on your account type and E*TRADE's current IRA options permissions. Confirm your account type supports options before applying.

Step-by-Step: Placing the Trade on E*TRADE

**Step 1 — Log in and navigate to the stock.** Go to etrade.com or open the E*TRADE app. In the search bar, type your ticker symbol (for example, AAPL) and open the quote page.

**Step 2 — Open the options chain.** On the quote page, click the "Options" tab. You will see a chain of calls on the left and puts on the right, organized by expiration date. Use the expiration dropdown to choose your target date. Most covered-call sellers focus on expirations 15 to 45 days out, where time decay (theta) works fastest in your favor.

**Step 3 — Choose your strike price.** Look at the call side. Each row shows a strike price, the bid price, the ask price, volume, open interest, and delta. For a conservative covered call, many traders pick a strike that is 3–7% above the current stock price (out-of-the-money). For a more aggressive income play, some go closer to at-the-money.

**Step 4 — Click Sell on your chosen strike.** Clicking "Sell" on a call row auto-populates an order ticket. E*TRADE will pre-fill: Action = Sell to Open, Quantity = however many contracts you enter, Expiration, Strike, and Option Type = Call.

**Step 5 — Set your price and order type.** Change the order type to Limit and set your limit price at or near the bid price. Never use a Market order for options — the bid-ask spread can be wide and you may get a poor fill. The Options Industry Council (OIC) consistently recommends limit orders for retail options traders.

**Step 6 — Review and confirm.** E*TRADE shows a summary screen with your maximum gain, the premium you will collect, and the fact that your shares will be held as collateral. Read it. Then click Place Order.

**Step 7 — Monitor the position.** Go to Accounts > Positions. Your short call appears as a negative quantity (e.g., -1 AAPL Call). Your shares show a "covered" notation. You can close the position early by buying back the call (Buy to Close) at any time before expiration.

Worked Example: Selling a Covered Call on AAPL

Let's make this concrete. Suppose you own 100 shares of Apple (AAPL) and the stock is trading at $195.00.

You open the options chain and look at calls expiring in 30 days. The $202.50 strike (about 3.8% out-of-the-money) shows a bid of $1.85 and an ask of $1.95. You enter a Sell to Open limit order for 1 contract at $1.90 (splitting the spread).

Your order fills. E*TRADE credits your account $190.00 (1 contract × 100 shares × $1.90 premium). That $190 is yours immediately regardless of what happens next.

**Scenario A — AAPL closes below $202.50 at expiration.** The call expires worthless. You keep the $190 premium and still own your 100 shares. Your effective cost basis on the shares dropped by $1.90 per share.

**Scenario B — AAPL closes above $202.50 at expiration.** Your shares are called away at $202.50. You receive $20,250 for the shares plus you already collected the $190 premium. Your total proceeds are $20,440. If you originally paid $185 per share ($18,500), your total profit is $1,940 — but you no longer own the shares and miss any further upside above $202.50.

**Annualized yield check:** $190 premium on $19,500 of stock (100 shares × $195) over 30 days = roughly 0.97% for the month, or about 11.8% annualized if you can repeat a similar trade each month. That is a rough estimate — actual results vary with volatility and market conditions.

Real Risks You Should Understand Before Trading

Covered calls are often marketed as low-risk, but they carry real trade-offs. Here is an honest list.

**Capped upside.** Your gain on the stock is capped at the strike price for the duration of the contract. If AAPL jumps from $195 to $220 before expiration, you still sell at $202.50. You gave up $17.50 per share of upside in exchange for $1.90 of premium. That is a bad trade in hindsight.

**You still own the downside.** The premium you collected ($1.90) only partially offsets a drop in the stock. If AAPL falls from $195 to $170, you lose $25 per share minus the $1.90 premium — a net loss of $23.10 per share. The covered call does not protect you from a large decline.

**Early assignment risk.** The buyer of your call can exercise it at any time before expiration (American-style options). This is most likely to happen just before the stock goes ex-dividend. If your shares get called away before the ex-dividend date, you miss the dividend. The OIC has detailed materials on early assignment risk that are worth reading before your first trade.

**Tax treatment is not simple.** The IRS treats covered call premiums as short-term capital gains in most cases, reported in the year the position closes. More importantly, selling a deep in-the-money call can suspend the holding period on your shares under IRS qualified covered call rules (Section 1092). This could convert a long-term capital gain on the stock into a short-term gain if you are assigned. Consult a tax professional and review IRS Publication 550 before trading covered calls on shares you have held less than a year. Canadian investors should review CRA Interpretation Bulletin IT-479R, which addresses options transactions and their tax treatment.

How to Close or Roll the Position Before Expiration

You are not locked in until expiration. You can close a covered call at any time by buying back the same contract (Buy to Close).

**Closing for a profit:** If AAPL drops after you sell the call, the call loses value. You might buy it back for $0.40 when you sold it for $1.90, locking in a $150 gain on the contract and freeing your shares.

**Rolling the position:** Rolling means buying back the current call and simultaneously selling a new call with a later expiration or a different strike. Traders roll to avoid assignment, extend income, or adjust to new price levels. On E*TRADE, you can do this as a spread order on the options chain to reduce execution risk and commissions.

**Letting it expire:** If the call expires out-of-the-money, E*TRADE automatically removes it from your account after market close on expiration Friday. No action needed. Your shares are free again and you can sell a new call the following week.

E*TRADE Costs and Platform Notes

As of the time of writing, E*TRADE charges $0.65 per options contract for most retail accounts, with a reduced rate of $0.50 per contract for traders who place 30 or more trades per quarter. There is no base commission on the trade itself. Always confirm current pricing directly with E*TRADE, as fee schedules change.

E*TRADE's Power E*TRADE platform (available as a desktop app and mobile app) offers a more advanced options chain view with Greeks (delta, theta, vega) displayed inline. If you are serious about covered calls, switching to Power E*TRADE is worth the five minutes it takes to download. The Greeks help you compare strikes more precisely — for example, a delta of 0.25 on your call means the market is pricing roughly a 25% chance of the stock finishing above that strike at expiration, a useful rough guide when selecting your strike.

SEC Regulation Best Interest (Reg BI) requires E*TRADE, like all US broker-dealers, to act in your best interest when making recommendations. If you use E*TRADE's automated suggestions or a financial consultant, that standard applies. When you self-direct your own trades, you are making the decision independently.

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. You apply through the Options section of your account settings and E*TRADE evaluates your experience, financial situation, and investment goals as required by FINRA Rule 2360. Approval can come within one to two business days for most applicants.

Can I sell covered calls in an E*TRADE IRA?

E*TRADE does allow covered calls in IRAs, but you must apply for options trading within the IRA account specifically — approval on your taxable account does not carry over automatically. Because IRAs are tax-advantaged accounts, the usual covered-call tax rules around short-term gains and holding period suspension still apply at the account level, so review IRS Publication 590-A and consult a tax advisor before trading options inside a retirement account.

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

If the stock closes above your strike at expiration, the Options Clearing Corporation (OCC) will assign your contract and E*TRADE will automatically sell your 100 shares at the strike price, typically overnight after expiration Friday. You keep the premium you collected plus the proceeds from the stock sale at the strike price. If early assignment happens before expiration, the same process occurs — your shares are sold and the premium is already in your account.

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

Most retail covered-call sellers choose a strike that is 3–7% above the current stock price (out-of-the-money) on a 30-day expiration, balancing meaningful premium against a reasonable chance the shares are not called away. A lower delta on the call (around 0.20–0.30) signals a lower probability of assignment, while a higher delta means more premium but a greater chance you lose the shares. The OIC offers free educational tools that walk through strike selection in detail.

Do covered call premiums count as income for taxes?

The IRS generally treats covered call premiums as short-term capital gains, not ordinary income, and they are taxed in the year the position closes — either at expiration, assignment, or when you buy the call back. If you sell a deep in-the-money call, IRS Section 1092 qualified covered call rules can suspend the holding period on your shares, potentially converting a long-term gain into a short-term gain. Review IRS Publication 550 and speak with a tax professional before trading.

Can I sell a covered call on E*TRADE if I only own 50 shares?

No — one standard options contract represents 100 shares, so you need at least 100 shares to sell one covered call. If you own 50 shares, you would be selling a naked call on the uncovered portion, which requires a higher options approval level and carries unlimited theoretical risk. Build your position to at least 100 shares first, or consider a broker that offers fractional-share options if that product becomes available.