How to Sell a Covered Call on Charles Schwab Step by Step (With Options Approval Level Requirements)

The Short Answer Before We Dive In

To sell a covered call on Charles Schwab, you need Options Approval Level 1 (sometimes called Tier 1), you must already own at least 100 shares of the underlying stock, and you place the trade using a 'Sell to Open' order on the StreetSmart Edge platform or Schwab.com. The whole process takes under five minutes once your account is approved. This article walks you through every step, shows you a real numbers example using Apple (AAPL), and explains the risks you need to understand before you collect a single dollar of premium.

What Options Approval Level Do You Need at Schwab?

Schwab uses a tiered approval system to make sure traders understand the strategies they are using. Selling covered calls requires Level 1 approval — the lowest tier available. This is intentional. Because you already own the shares that back the call, your maximum loss is capped and well-defined. You are not selling a naked call, which would require Level 3 or higher.

To get Level 1 approval, Schwab asks you to fill out an options application inside your account settings. You will answer questions about your investing experience, annual income, net worth, and investment objectives. FINRA Rule 2360 requires broker-dealers to collect this information before approving options trading, so every brokerage does this — Schwab is not being unusually strict.

If you are already approved for options at another broker and you transferred your account to Schwab, you still need to apply separately. Approval is account-specific. Most straightforward applications for Level 1 are approved the same business day or within 24 hours. If Schwab asks for more information, they will email you.

What You Need Before You Place the Trade

Before you touch the order ticket, confirm three things:

1. You own at least 100 shares of the stock you want to write calls against. One standard options contract covers exactly 100 shares. If you own 250 shares, you can sell a maximum of two contracts (covering 200 shares) and keep 50 shares uncovered.

2. Your account has Level 1 options approval active. You can check this under Account > Features > Options Trading on Schwab.com.

3. The stock you own has listed options. Most large-cap US stocks do, but some smaller names and ETFs do not. You can verify by searching the ticker in the options chain on Schwab.

You do not need to deposit extra cash or margin to sell a covered call. The shares you already hold serve as the collateral. The Options Industry Council (OIC) describes this as a 'buy-write' or 'overwrite' strategy and classifies it as one of the most conservative options strategies available to retail investors.

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

The steps below use Schwab.com. The StreetSmart Edge desktop platform follows the same logic with a slightly different layout.

Step 1 — Log in and go to Trade > Options. From the main navigation bar, click 'Trade,' then select 'Options.' You can also search your ticker in the quote bar and click the 'Options Chain' tab on the quote page.

Step 2 — Pull up the options chain for your stock. Type in your ticker. For this example, use AAPL. Set the expiration date filter. Most covered-call sellers start with expirations 21 to 45 days out because that range captures the fastest time-decay (theta) relative to premium received. The CBOE publishes data showing that options lose roughly one-third of their remaining time value in the final 30 days before expiration.

Step 3 — Choose your strike price. Scroll to the CALLS side of the chain. You will see bid and ask prices next to each strike. A strike above the current stock price is 'out of the money' (OTM). An OTM strike lets the stock rise somewhat before your shares get called away. For a conservative income trade, most traders pick a strike 3%–7% above the current price.

Real example: AAPL is trading at $213.00. You own 100 shares. You select the $220 call expiring in 30 days. The bid is $2.85 and the ask is $2.90. You enter a limit order to sell at $2.87 (splitting the spread). If filled, you collect $287 in premium (100 shares × $2.87) before commissions.

Step 4 — Set up the order ticket. On the order ticket, set: - Action: Sell to Open - Quantity: 1 contract (for 100 shares) - Symbol: AAPL 220 Call [your chosen expiration date] - Order Type: Limit - Limit Price: $2.87 - Time in Force: Day (or Good Till Canceled if you want more time to fill)

Always use a limit order, not a market order. Options spreads can be wide, and a market order can fill at the bid — costing you real money.

Step 5 — Review and confirm. Schwab shows you a confirmation screen with the full details. Read it. Confirm the expiration date, strike, and premium. Click 'Place Order.'

Step 6 — Monitor the position. After the fill, the position appears under Positions. You will see the short call alongside your long stock. You can close the position early by placing a 'Buy to Close' order at any time before expiration.

What Are the Real Risks Here?

Covered calls are conservative compared to most options strategies, but they are not risk-free. You need to understand three specific risks before you sell your first contract.

Capped upside: If AAPL jumps from $213 to $235 before expiration, your shares get called away at $220. You keep the $287 premium and the $700 gain from $213 to $220, but you miss the extra $1,500 move from $220 to $235. This is the core trade-off. You are exchanging upside potential for immediate income.

Stock still falls: The $287 premium gives you a small cushion — your effective cost basis drops by $2.87 per share. But if AAPL drops from $213 to $190, you lose $23 per share on the stock. The premium only offsets $2.87 of that. Selling covered calls does not protect you from a serious decline. The SEC's investor education materials remind retail investors that options income does not substitute for a stop-loss or a diversified portfolio.

Early assignment: American-style options (which most US equity options are) can be assigned before expiration. This is rare but it happens, especially when a stock goes ex-dividend and the call is deep in the money. If you are assigned early, Schwab will sell your 100 shares at the strike price. You keep the premium already collected. FINRA's investor alerts note that early assignment is a risk all covered-call writers should understand before entering the trade.

How Does Schwab Handle Expiration and Assignment?

If your call expires out of the money (stock price stays below your strike at expiration), the contract expires worthless. You keep the full premium and you keep your shares. You can then sell another call the following week or month.

If your call expires in the money (stock price is above your strike at expiration), Schwab will automatically exercise the call against you. Your 100 shares are sold at the strike price. This happens after market close on expiration Friday. You do not need to do anything manually — Schwab handles it.

If you want to avoid assignment, you can buy the call back before expiration. This is called 'buying to close.' If the call has lost most of its value — say it is now worth $0.15 — you might pay $15 to close it and free up your shares. Many experienced covered-call writers use a rule like: buy to close when the option has lost 80% of its value, then sell a new call further out in time.

Tax note: When your shares are called away, the sale triggers a capital gain or loss. The premium you collected is also taxable income. In the US, the IRS treats covered-call premiums as short-term capital gains in most cases. In Canada, the CRA has specific rules on how option premiums are characterized depending on whether the position is held as capital or income. Consult a tax professional for your specific situation.

Quick Reference: Schwab Covered Call Checklist

Use this before every trade:

✓ Own 100+ shares of the underlying stock ✓ Level 1 options approval active on the account ✓ Stock has liquid listed options (check bid-ask spread — tight spreads mean better fills) ✓ Chosen an expiration 21–45 days out ✓ Selected an OTM strike that reflects your price target and income goal ✓ Using a limit order, not a market order ✓ Understand the maximum gain (premium + stock appreciation to strike) and maximum loss (stock goes to zero minus premium collected) ✓ Know your plan if the stock moves sharply up or down before expiration

The OIC offers free courses on covered calls at their education center if you want to deepen your understanding before placing your first trade. CBOE also publishes historical data on covered-call index performance (the CBOE S&P 500 BuyWrite Index, ticker BXM) that shows long-run risk and return characteristics of the strategy.

What options approval level do I need to sell covered calls on Schwab?

You need Level 1 (Tier 1) options approval, which is the lowest level Schwab offers. You apply through Account > Features > Options Trading on Schwab.com and answer questions about your experience and finances as required by FINRA Rule 2360. Most straightforward applications are approved within one business day.

Can I sell a covered call on Schwab if I only own 50 shares?

No. One standard options contract covers exactly 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 much higher approval level and carries unlimited risk.

What happens to my covered call if Schwab merges with or changes its platform?

Your open options positions are held in your account and are not affected by platform changes. Options contracts are cleared through the Options Clearing Corporation (OCC), which is a separate regulated entity, so your contracts remain valid regardless of any brokerage platform updates.

How much premium can I realistically collect selling covered calls on AAPL?

Premium varies with volatility, time to expiration, and how far out of the money your strike is. As a rough benchmark, a 30-day OTM call on AAPL at a strike about 3% above the current price has historically generated roughly 1%–2% of the stock's value per month, though this changes constantly. Always check the live options chain for current bid-ask prices before estimating your income.

Will Schwab automatically exercise my covered call at expiration?

If your call expires in the money, Schwab will automatically sell your 100 shares at the strike price after market close on expiration Friday — you do not need to take any action. If the call expires out of the money, it expires worthless and you keep your shares and the full premium collected.

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

The IRS generally treats premiums from covered calls as short-term capital gains, but the exact treatment depends on factors like whether the call is a 'qualified covered call' and your holding period in the underlying stock. The rules are detailed in IRS Publication 550, and you should consult a tax professional to understand how they apply to your specific trades.