How to Sell Covered Calls on Robinhood for Beginners: A Step-by-Step Guide

The Short Answer: Yes, You Can Sell Covered Calls on Robinhood

You can sell covered calls on Robinhood as long as you own at least 100 shares of the stock and your account is approved for Level 2 options trading. The process takes about five minutes once your account is set up. This guide walks you through every step, shows you a real trade example using Apple (AAPL), and explains the risks you need to understand before you place your first order.

What You Need Before You Place Your First Trade

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

First, you need 100 shares of the underlying stock. One standard options contract always covers exactly 100 shares, as defined by the Options Industry Council (OIC). If you own 250 shares of AAPL, you can sell a maximum of two covered call contracts at once.

Second, your account needs Level 2 options approval. Robinhood assigns options levels based on your trading experience, income, and investment objectives — a process required by FINRA rules. To apply, go to Account → Settings → Options Trading and answer the questionnaire honestly. Most buy-and-hold investors qualify for Level 2, which covers selling covered calls and buying single-leg options.

Third, you need a margin or standard brokerage account. Robinhood's basic cash account works for covered calls because your shares act as the collateral — you are not borrowing money. The SEC classifies covered calls as a defined-risk strategy because your maximum loss is capped by the shares you already hold.

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

Here is exactly how to do it inside the Robinhood app.

Step 1 — Open the stock's detail page. Search for your ticker (for example, AAPL) and tap the stock.

Step 2 — Tap Trade, then Trade Options. This opens the options chain.

Step 3 — Select Call and choose your expiration date. Weekly expirations (every Friday) are available on liquid names like AAPL, MSFT, NVDA, and SPY. Most beginners start with expirations 2–4 weeks out to balance premium size against time commitment.

Step 4 — Pick your strike price. Scroll the chain to find a strike above the current stock price (out-of-the-money, or OTM). Tap the strike row to see the bid and ask prices.

Step 5 — Tap Sell, confirm the contract count (remember: 1 contract = 100 shares), and set your limit price. Never use a market order for options — the bid-ask spread can be wide. Set your limit at or just below the mid-price between the bid and ask.

Step 6 — Review and confirm. Robinhood shows you a plain-English summary of the trade before you submit. Read it. Tap Submit.

Your premium lands in your account as soon as the order fills. You keep that cash no matter what happens next.

A Real Worked Example: Selling a Covered Call on AAPL

Let's say it is a Monday morning and AAPL is trading at $213.50 per share. You own 100 shares, so you decide to sell one covered call contract.

You look at the options chain for the expiration 21 days away. The $220 strike call — about 3% above the current price — shows a bid of $2.10 and an ask of $2.30. You set a limit order at $2.20 (the midpoint) and it fills.

Premium collected: $2.20 × 100 shares = $220 cash, deposited immediately.

Now two outcomes matter at expiration:

Outcome A — AAPL closes below $220. Your call expires worthless. You keep the $220 premium and still own all 100 shares. Your effective cost basis on those shares just dropped by $2.20 per share.

Outcome B — AAPL closes above $220. Your shares get called away at $220 each. You receive $22,000 for the shares plus you keep the $220 premium. Your total proceeds are $22,220. If you originally paid $200 per share, your profit is $22,220 − $20,000 = $2,220 on the position. The trade-off: you miss any gains above $220.

Annualized yield on the premium alone (if you repeated a similar trade every 21 days): roughly $220 × 17 cycles ÷ $21,350 cost basis ≈ 17.5% — though real results vary with volatility and strike selection.

The Risks You Must Understand — Not Buried, Right Here

Covered calls are one of the most conservative options strategies, but they carry real risks that beginners often underestimate.

Capped upside is the biggest one. If AAPL jumps from $213.50 to $240 before expiration, you still sell at $220. You gave up $20 per share in gains in exchange for $2.20 in premium. That trade-off can sting in a fast-moving bull market.

Early assignment is possible. American-style options (which is what Robinhood trades on individual stocks) can be exercised by the buyer at any time before expiration, not just on the last day. The OIC notes that early assignment most often happens when a call goes deep in-the-money or just before an ex-dividend date. If your shares get called away early, your position closes whether you planned for it or not.

You still own the downside. A covered call does not protect you from a falling stock. If AAPL drops from $213.50 to $185, you lose roughly $28.50 per share on the stock. The $2.20 premium softens the blow slightly but does not eliminate it. Your shares are still at risk.

Liquidity matters. Stick to high-volume, liquid stocks and ETFs — AAPL, MSFT, NVDA, SPY, QQQ. Thinly traded options have wide bid-ask spreads that eat into your premium before you even start.

Robinhood-specific note: Robinhood may automatically close or exercise options positions near expiration if they are in-the-money. Review Robinhood's options exercise policy in the app so you are not surprised.

How Covered Call Premiums Are Taxed in the US and Canada

Tax treatment is one of the most overlooked parts of covered call trading for beginners.

In the United States, the IRS treats premiums you collect from selling covered calls as short-term capital gains in most situations, regardless of how long you have held the underlying stock. There is an important wrinkle: if the covered call you sell is considered a 'qualified covered call' under IRS rules, your holding period on the underlying shares is not suspended. If the call is not qualified — typically because it is deep in-the-money — the IRS may suspend your long-term holding period on the shares while the call is open. This can convert what would have been a long-term gain on the stock into a short-term gain. Consult a tax professional or review IRS Publication 550 for the specific qualified covered call rules.

In Canada, the Canada Revenue Agency (CRA) generally treats option premiums as income or capital gains depending on whether you are considered a trader or an investor. Most buy-and-hold investors report premiums as capital gains, but the CRA looks at frequency and intent. Canadian investors should review CRA Interpretation Bulletin IT-479R or speak with a tax advisor.

One practical tip for both countries: keep a trade log. Record the date, ticker, strike, expiration, premium received, and outcome for every trade. This makes tax time far simpler.

Common Beginner Mistakes and How to Avoid Them

Selling too close to the money chasing big premiums. A $5 premium sounds great until AAPL rallies $8 and your shares get called away. Start with strikes at least 3–5% above the current price to give yourself a buffer.

Ignoring earnings dates. If an earnings announcement falls before your expiration, implied volatility will spike and then collapse after the report. Selling a covered call right before earnings can mean your shares get called away on a big move, or the premium evaporates faster than expected after the event. Check the earnings calendar before you pick an expiration.

Using market orders. Always use limit orders for options. The bid-ask spread on even liquid options can be $0.10–$0.30 wide. A market order hands that spread to the market maker.

Forgetting about dividends. If the stock pays a dividend and your call is in-the-money near the ex-dividend date, early assignment risk rises sharply. The buyer may exercise early to capture the dividend. Know your stock's dividend schedule.

Over-committing shares. Do not sell covered calls on 100% of your shares if you might need to sell the stock for other reasons. Keep some shares unencumbered so you have flexibility.

Does Robinhood allow selling covered calls?

Yes. Robinhood supports covered call selling under Level 2 options approval. You need to own at least 100 shares of the underlying stock and complete Robinhood's options application, which follows FINRA suitability requirements. Most long-term stock holders qualify for Level 2.

How much money do I need to sell a covered call on Robinhood?

You do not need extra cash — you need 100 shares of the stock you want to write the call against. Those shares serve as the collateral. For example, if AAPL is at $213.50, you need shares worth roughly $21,350 already in your account, not additional margin.

What happens if my covered call gets assigned on Robinhood?

If the call buyer exercises the option, Robinhood will sell your 100 shares at the strike price you agreed to. You keep the premium you collected plus the proceeds from the share sale. The OIC describes this as the normal, expected outcome when a call expires in-the-money.

Can I sell covered calls on ETFs like SPY on Robinhood?

Yes, as long as you own at least 100 shares of the ETF. SPY and QQQ are among the most liquid options markets in the world, which means tighter bid-ask spreads and easier order fills. They are often recommended by the OIC as good starting points for new options sellers.

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

Go to your Positions tab, tap the open options contract, and select Close Position. This opens a buy-to-close order. You will pay the current market price to buy back the call, which ends your obligation. If the stock has not moved much, you can often buy it back for less than you sold it for and pocket the difference.

Are covered call premiums taxed as ordinary income or capital gains?

In the US, the IRS generally treats covered call premiums as short-term capital gains. If the call does not meet the IRS definition of a 'qualified covered call,' it can also suspend the long-term holding period on your shares — review IRS Publication 550 or consult a tax advisor. In Canada, the CRA typically treats premiums as capital gains for buy-and-hold investors, but frequency of trading can change that classification.