How to Sell a Covered Call on E*TRADE: Step-by-Step Guide Including Approval Level

The Short Answer: Level 1 and 100 Shares

To sell a covered call on E*TRADE, you need options approval Level 1 and you must already own at least 100 shares of the underlying stock. Once approved, you go to the options chain for your stock, select a call strike above the current price, and sell to open. That is the whole framework — everything below fills in the details.

What Options Approval Level Does E*TRADE Require?

E*TRADE uses a tiered approval system that runs from Level 0 to Level 4. Covered calls sit at Level 1 — the lowest tier that involves actual options trading. FINRA Rule 2360 requires every broker to assess a customer's options knowledge, experience, and financial situation before granting approval, and E*TRADE follows that rule through its online application.

Level 1 covers only covered calls and cash-secured puts. You do not need Level 2 (long options), Level 3 (spreads), or Level 4 (naked options) to run a basic covered-call income strategy. If you already have a margin or brokerage account at E*TRADE, you apply for options approval inside the account settings — it usually takes one business day.

When you apply, E*TRADE asks about your investing experience, annual income, net worth, and investment objectives. Answer honestly. The SEC's investor-protection rules require brokers to verify suitability, and misrepresenting your experience can create problems later. If you are declined at Level 1, E*TRADE will tell you why, and you can reapply after gaining more documented experience.

Setting Up the Trade: A Real AAPL Example

Let's walk through a concrete trade so the steps are not abstract.

Assume you own 100 shares of Apple (AAPL) purchased at $185 per share. AAPL is currently trading at $213. You want to generate income without selling your shares outright.

Step 1 — Open the options chain. In E*TRADE's Power E*TRADE platform, type AAPL in the search bar, click the stock, then select the 'Options' tab. You will see a chain of calls and puts sorted by expiration date.

Step 2 — Pick an expiration. For a first trade, many covered-call sellers start with 30-45 days to expiration (DTE). Select the expiration roughly 30 days out.

Step 3 — Choose a strike price. You want a call that is out-of-the-money (OTM) so you keep upside room. Say the $220 strike is showing a bid of $2.10 and an ask of $2.20. The delta on that strike is roughly 0.28, meaning the market prices about a 28% chance AAPL closes above $220 at expiration. The OIC describes delta as a useful proxy for the probability that an option expires in-the-money.

Step 4 — Enter the order. Click 'Sell' on the $220 call row. E*TRADE will pre-populate a ticket: Action = Sell to Open, Quantity = 1 contract (covering your 100 shares), Expiration = your chosen date, Strike = $220, Order Type = Limit. Set your limit price at the midpoint — $2.15 in this example.

Step 5 — Review and send. E*TRADE shows your maximum gain, breakeven, and the fact that your 100 AAPL shares will be held as collateral. Confirm and submit.

If filled at $2.15, you collect $215 in premium (1 contract × 100 shares × $2.15). That is yours to keep regardless of what AAPL does. Your effective sale price if assigned is $220 + $2.15 = $222.15 per share.

What Are the Real Risks Here?

Covered calls are considered one of the lower-risk options strategies, but risks are real and you should understand them before your first trade.

Capped upside is the biggest trade-off. If AAPL jumps from $213 to $235 before expiration, you still sell at $220 (plus the $2.15 premium). You miss $12.85 per share of gain. The premium you collected does not come close to covering that opportunity cost.

Assignment risk is always present once your call goes in-the-money. E*TRADE, like all brokers, follows the Options Clearing Corporation (OCC) assignment process. You could be assigned any time after the call goes in-the-money, not just at expiration — this is called early assignment. It is rare on equity options that have time value remaining, but it happens most often around ex-dividend dates when the dividend exceeds the remaining time value of the call.

Downside is not protected. If AAPL drops from $213 to $190, you lose $23 per share on the stock. The $2.15 premium offsets only a small portion of that loss. A covered call is not a hedge — it is an income tool.

Liquidity risk matters too. If you sell a call on a thinly traded stock, the bid-ask spread can be wide and you may not get a fair fill. Stick to liquid names with tight spreads — AAPL, MSFT, NVDA, SPY — especially when you are starting out.

Tax Treatment: What the IRS Says About Covered Call Premium

Premium you collect from selling a covered call is not taxed when you receive it. The IRS treats it as an open transaction until the call expires, is bought back, or results in assignment.

If the call expires worthless, the premium becomes a short-term capital gain in the tax year of expiration — regardless of how long you held the underlying stock. The IRS does not let you convert it to long-term simply because you held the shares for years.

If you are assigned and your shares are called away, the premium is added to your sale proceeds. Your holding period for the shares determines whether the gain on the stock itself is short-term or long-term. However, IRS rules on 'qualified covered calls' (Section 1092) can suspend your holding period on the underlying stock while a deep in-the-money call is open. For most standard OTM covered calls this is not an issue, but it is worth reviewing with a tax professional if you are close to the one-year mark on your shares.

Canadian investors using a non-registered account should note that the CRA treats covered call premiums as capital gains or income depending on the frequency of trading and intent — the CRA's Interpretation Bulletin IT-479R covers securities transactions. TFSA and RRSP accounts have their own rules around options trading, and not all brokers permit covered calls inside registered accounts.

Managing the Trade After You're In

You have three choices once a covered call is open: let it expire, roll it, or buy it back.

Let it expire worthless. If AAPL stays below $220 through expiration, the call expires and you keep the full $215 premium. Your shares are free and you can sell another call the next cycle.

Buy it back early. If the call drops in value — say AAPL pulls back and the $220 call is now worth $0.40 — you can buy to close for $40 and lock in $175 of the $215 premium. Many covered-call sellers use a 50% profit target as a rule of thumb to close early and redeploy capital.

Roll the position. Rolling means buying back the current call and selling a new one at a later expiration or higher strike in the same order ticket. E*TRADE's Power E*TRADE platform has a built-in roll function on the positions screen. Rolling can extend your income stream and, if you roll up in strike, give your stock more room to run.

Avoid letting assignment surprise you. Watch your position in the final week before expiration if AAPL is near or above $220. E*TRADE will notify you if early assignment occurs, but checking your positions daily during that window is good practice.

Quick Checklist Before You Place Your First Covered Call on E*TRADE

Run through this list before hitting send on your first order:

1. You own at least 100 shares of the stock in the same E*TRADE account where you are selling the call. 2. Your account shows options approval Level 1 or higher. 3. You have chosen a liquid stock with a tight bid-ask spread on the options chain. 4. Your strike is out-of-the-money and you are comfortable selling your shares at that price if assigned. 5. You have noted the ex-dividend date — if one falls before expiration, early assignment risk rises. 6. You are using a limit order at or near the midpoint of the bid-ask, not a market order. 7. You understand the tax year in which the premium will be recognized.

If every box is checked, you are ready to place the trade.

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

You need Level 1 options approval on E*TRADE to sell covered calls. This is the entry-level tier and requires you to own at least 100 shares of the underlying stock as collateral. You apply through your account settings and E*TRADE typically responds within one business day.

Can I sell a covered call on E*TRADE in a Roth IRA or traditional IRA?

Yes, E*TRADE allows covered calls inside IRA accounts, including Roth and traditional IRAs, as long as you have the appropriate options approval on that specific account. Each account type requires its own approval — approval on a taxable account does not automatically carry over. Because IRAs are tax-advantaged, the premium income treatment differs from a taxable account, so consult IRS Publication 590 for IRA-specific rules.

How much money do I need to sell a covered call on E*TRADE?

You do not need extra cash — you need 100 shares of the stock you are writing the call against. Those shares serve as the collateral, so E*TRADE does not require a separate cash deposit for a standard covered call. The premium you collect is credited to your account when the order fills.

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

If your call is assigned, E*TRADE will automatically sell your 100 shares at the strike price and credit the proceeds to your account, usually the next business day. You keep the premium you already collected, and the strike price plus premium becomes your effective sale price. If you want to keep your shares, you need to buy back the call before assignment occurs.

Is selling covered calls on E*TRADE considered a margin trade?

No — a covered call is not a margin trade because your existing shares fully collateralize the position. E*TRADE holds your shares as the cover, so you are not borrowing money or incurring margin interest. This is one reason FINRA and the OIC classify covered calls as a conservative, defined-risk strategy.

How do I close a covered call early on E*TRADE before expiration?

Go to your Positions screen in Power E*TRADE, find the short call, and select 'Buy to Close.' Enter a limit order at or near the current ask price to exit the position. Once filled, your shares are free of the obligation and you can sell a new call for the next expiration cycle.