How to Sell a Covered Call in Fidelity: Step-by-Step Guide for Retail Traders

The Short Answer: Here Is How to Sell a Covered Call in Fidelity

To sell a covered call in Fidelity, you need three things already in place: 100 shares of the stock you want to write against, options trading approval at Level 1 (Covered Calls) on your account, and a funded brokerage or IRA account. Once those boxes are checked, you go to the stock's options chain inside Fidelity, pick your strike and expiration, and place a Sell to Open order for one contract. The whole process takes under five minutes once you know the screen layout.

Step 1 — Get Options Approval on Your Fidelity Account

Fidelity uses a tiered options approval system. Covered calls fall under Level 1, the most basic tier. FINRA Rule 2360 requires brokers to collect information about your investment experience, financial situation, and objectives before granting options access, and Fidelity follows that rule.

To apply or check your current level, log in to Fidelity.com, go to Accounts & Trade → Account Features → Brokerage & Trading → Options. If you are not yet approved, click Apply and answer the questionnaire honestly. Most retail investors with basic stock experience are approved for Level 1 within one business day. If you are declined, Fidelity will tell you why, and you can reapply after gaining more experience or adding more assets.

One important note for IRA holders: Fidelity does allow covered calls inside traditional and Roth IRAs, but you must apply for options approval specifically on that account. The IRS treats premiums collected inside an IRA as tax-deferred or tax-free income depending on account type, which is a meaningful advantage over a taxable account.

Step 2 — Confirm You Own 100 Shares (the 'Covered' Part)

A covered call is only covered if you own at least 100 shares of the underlying stock per contract you sell. One contract equals 100 shares. If you own 250 shares of AAPL, you can sell two contracts and still have 50 shares uncovered — meaning you should not sell a third contract unless you are comfortable with a naked call, which requires a higher approval level and carries unlimited theoretical risk.

Check your positions under Accounts → Positions before placing any order. Make sure the shares are fully settled. Fidelity will not let you write a covered call against shares purchased on the same day if they have not settled (standard settlement is T+1 for stocks as of May 2024 under SEC Rule 15c6-1 as amended).

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

Navigate to the stock's quote page. In the example below we will use Apple (AAPL). Type AAPL in the search bar, open the quote page, and click the Options tab near the top of the page. This opens the full options chain.

You will see expiration dates listed across the top or in a dropdown. Weekly expirations run every Friday; monthly expirations fall on the third Friday of each month. Most covered-call traders start with 30-to-45-day expirations because that range captures the steepest part of time decay (theta) without tying up shares for too long.

Worked Example — AAPL at $213.50: Suppose AAPL is trading at $213.50. You own 100 shares. You want to collect income without selling your shares too cheaply. You scroll to the expiration 35 days out and look at the call side of the chain. The $220 strike (about 3% out of the money) shows a bid of $2.10 and an ask of $2.20. The midpoint is $2.15. One contract covering 100 shares would bring in $215 in premium if filled at the midpoint.

That $215 is yours to keep no matter what happens, as long as you entered the trade correctly. If AAPL closes below $220 at expiration, the option expires worthless and you keep the premium plus your shares. If AAPL closes above $220, your shares get called away at $220 — you still keep the $215 premium, so your effective sale price is $222.15 per share.

Key things to check in the chain before placing the order: - Delta: The $220 strike might show a delta of roughly 0.28, meaning there is about a 28% chance the option finishes in the money. Lower delta = lower premium but lower assignment probability. - Bid-ask spread: Liquid names like AAPL typically have spreads of $0.05-$0.15. Wide spreads (over $0.50) on thinly traded strikes cost you money on entry and exit. - Open interest and volume: Look for strikes with open interest above 500 contracts. The OIC recommends checking liquidity before entering any options position.

Step 4 — Place the Sell to Open Order in Fidelity

From the options chain, click the bid price on the call strike you selected. Fidelity will pre-populate an order ticket. Here is what each field should say:

- Action: Sell to Open - Symbol: AAPL (or your stock) - Expiration: your chosen date - Strike: your chosen strike (e.g., 220) - Type: Call - Contracts: 1 (or however many lots you are selling) - Order Type: Limit (always use a limit order — never market orders on options) - Limit Price: set at or near the midpoint of the bid-ask spread. For our AAPL example, try $2.15. - Time in Force: Day or Good Till Canceled (GTC). Day is fine for liquid names during market hours.

Double-check the order preview screen. Fidelity shows you the maximum gain, maximum loss, and breakeven before you confirm. The maximum gain on a covered call is capped at the premium plus any upside to the strike. The maximum loss is the same as owning the stock outright minus the premium collected — if AAPL dropped to zero, you would lose $213.50 minus $2.15 = $211.35 per share. The premium provides a small buffer, not a large one.

Click Confirm and Send. You will see the order in your Activity & Orders tab. For liquid strikes on AAPL, a midpoint limit order typically fills within seconds during regular market hours (9:30 a.m. to 4:00 p.m. ET).

What Are the Real Risks You Need to Understand Before You Trade?

Covered calls are considered one of the lower-risk options strategies, and FINRA classifies them as a defined-risk strategy because your downside is tied to stock ownership, not to unlimited loss. But lower risk does not mean no risk. Here are the three risks that actually hurt retail traders:

1. Assignment risk: If AAPL closes above $220 at expiration, Fidelity will automatically sell your 100 shares at $220. You keep the premium, but you no longer own the stock. If AAPL then runs to $240, you missed that $20 gain. Early assignment (before expiration) is rare on calls but can happen on the day before an ex-dividend date if the option is deep in the money. The OIC explains early assignment mechanics in detail in its free educational materials.

2. Downside is not protected: The $215 premium on our AAPL example offsets only about 1% of a decline. If AAPL drops 10%, you lose roughly $2,135 on the stock position and only recovered $215 in premium. Covered calls reduce your cost basis slightly; they do not hedge a major drop.

3. Opportunity cost: You cap your upside at the strike. If you sell the $220 call and AAPL jumps to $235, you still sell at $220 plus keep the $2.15 premium. That is a real trade-off, not a hypothetical one.

Manage these risks by choosing strikes that reflect a price you would actually be happy selling your shares at, and by not writing calls on positions you plan to hold for the long term without interruption.

Tax Treatment: What Fidelity Reports and What You Owe

In a taxable US account, the IRS treats covered call premiums as short-term capital gains in most cases, reported on Form 1099-B that Fidelity sends you each January. The premium is not taxed when you collect it — it is taxed when the position closes (either the option expires, you buy it back, or your shares are assigned).

IRS Publication 550 covers the wash-sale and qualified covered call rules in detail. A key point: if you sell a deep-in-the-money call, the IRS may classify it as a qualified covered call, which can affect the holding period of your underlying shares and potentially convert a long-term gain into a short-term gain. Stick to out-of-the-money or slightly in-the-money strikes to avoid this complication, or consult a tax professional before writing calls on shares with large embedded gains.

Canadian investors using a non-registered account 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. Inside a TFSA or RRSP, the same covered-call mechanics apply as in a US IRA: premiums grow sheltered from tax.

Fidelity will track your options activity and cost-basis adjustments automatically, but always reconcile your 1099-B against your own records at tax time.

How to Monitor and Close the Position Before Expiration

You do not have to hold a covered call until expiration. Many experienced traders close the position early by buying back the call (a Buy to Close order) when the option has lost 50%-80% of its value. For example, if you sold the AAPL $220 call for $2.15 and it drops to $0.45 with two weeks left, you could buy it back for $45 and lock in a $170 gain. You then own your shares free and clear and can sell another call for the next cycle.

To close in Fidelity: go to Accounts → Positions, find the short call position, click it, and select Buy to Close. Enter a limit order at or near the current ask price. After the order fills, the position disappears from your account and your shares are no longer obligated.

Tracking your positions is straightforward in Fidelity's Active Trader Pro desktop platform or the standard web interface. Both show your short call's current value, days to expiration, and unrealized gain or loss in real time.

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

You need Level 1 options approval at Fidelity, which is the entry-level tier. It covers only covered calls and is the easiest level to obtain. You apply through Account Features under Brokerage & Trading, and most applicants with basic investing experience are approved quickly.

Can I sell covered calls in a Fidelity IRA?

Yes, Fidelity allows covered calls inside both traditional and Roth IRAs, but you must apply for options approval on that specific account separately. Premiums collected inside a Roth IRA grow tax-free, which is a significant advantage. The IRS does not allow naked or uncovered options strategies inside IRAs.

How much money do I need to sell one covered call in Fidelity?

You need to already own 100 shares of the stock you want to write against — there is no additional margin requirement for a covered call because your shares serve as the collateral. For AAPL at $213.50, that means having $21,350 worth of stock already in the account. The premium you collect is deposited into your account the next business day after the trade.

What happens if my covered call gets assigned at Fidelity?

If the stock closes above your strike at expiration, Fidelity will automatically sell your 100 shares at the strike price and credit the proceeds to your account. You keep the premium you collected when you opened the trade. You will receive a notification, and the transaction settles in one business day.

Should I use a limit order or a market order when selling a covered call?

Always use a limit order. Market orders on options can fill at the bid price or worse, especially in fast-moving markets or on less liquid strikes, costing you meaningful premium. Set your limit at the midpoint of the bid-ask spread and adjust slightly if you need a faster fill.

How do I avoid the wash-sale rule when selling covered calls?

The wash-sale rule under IRS rules primarily affects stock repurchases, but deep-in-the-money covered calls can affect your shares' holding period under the qualified covered call rules in IRS Publication 550. To stay clear of complications, sell out-of-the-money calls and avoid writing calls on shares you sold at a loss within 30 days. When in doubt, consult a tax professional before trading.