Covered Calls, in Plain English
The loan is free because the collateral earns income, and that income comes from covered calls: one of the oldest income strategies in finance, and a standard part of how institutions and private wealth managers earn on the stocks they hold.
The basic idea
You own a share. You sell someone the right to buy it from you at a fixed price (the strike) before a fixed date (the expiry). They pay you for that right up front. That payment is the premium, and it is yours whatever happens next. The call is "covered" because you own the shares you might have to deliver.
A textbook example
This is a generic illustration, not Spout's settings. You own 100 shares at $100. You sell one call with a $105 strike, expiring in a week, for $0.80 a share: $80 in premium.
| Stock at expiry | What happens | Your result |
|---|---|---|
| $98 | The call expires unused | You keep the shares and the $80. The $200 fall is softened by the premium. |
| $104 | The call expires unused | You keep the shares, the $400 gain and the $80 |
| $110 | The call is exercised; you sell at $105 | You keep the $500 gain up to the strike and the $80, and give up the $500 above the strike |
The trade off in one line
A covered call turns some of a stock's rare, large upside into steady income. Most of the time the call expires unused and the premium is pure income. Occasionally the stock rallies past the strike and the seller gives up the part of the rally above it.
Why this pays over time
Done systematically, covered calls harvest the volatility risk premium: the long running tendency for options to be priced for bigger moves than stocks actually make. The next page explains it.