SoFi

As the most widely recognized and adopted cryptocurrency, Bitcoin’s price can in many ways serve as a barometer for the health of the entire crypto market. With the highest market cap of all cryptocurrencies by a wide margin, it has the potential to lift the prices of other cryptocurrencies in the wake of its own price increases, and likewise pull broader market prices down when its own numbers fall.

The price of Bitcoin (BTC) has been on a wild ride since it launched over 17 years ago, on January 3, 2009. Those who bought Bitcoin early have seen its price fluctuate significantly, surpassing $126,000 for a brief moment in October 2025 after a steep decline in 2023, and then losing steam in early 2026. Over the years, Bitcoin’s price volatility has led to rapid gains and also considerable losses.

A review of Bitcoin price history shows plenty of ups and some significant downs, but despite the risks, crypto fans continue to seek it out. Like other cryptocurrencies, Bitcoin’s price is largely driven by sentiment, and those who buy in must be comfortable with the elevated risk that buying and selling crypto entails.

Bitcoin Price History Over the Years

A glance at the Bitcoin historical price chart illustrates the cryptocurrency’s steep rise since its inception. It’s equally clear that the path to Bitcoin’s current price has not always been a smooth one, and that it may continue to see fluctuations over time.

While some enjoy comparing Bitcoin’s price history to past speculative manias like Beanie Babies circa 1995 (or the infamous tulip bubble circa 1636), speculation is only one factor in any given Bitcoin price fluctuation.

Over the years, one pattern can be seen in Bitcoin’s prices. Every four years, the network undergoes a change called “the halving,” where the supply of new BTC rewarded to Bitcoin miners gets cut in half. This has happened four times so far:

•   2012: 50 BTC to 25 BTC

•   2016: 25 BTC to 12.5 BTC

•   2020: 12.5 BTC to 6.25 BTC

•   2024: 6.25 BTC to 3.125 BTC

The next Bitcoin halving is set to occur in March or April of 2028.

In each instance, the price of BTC reached new record highs in the year or so following each halving event. This was typically followed by a Bitcoin bear market. After a period of consolidation, the price then tended to move upwards again in advance of the next halving, though there’s no guarantee that this may occur in the future.

While the price of BTC can hardly be considered predictable, it’s useful to view the chapters in the Bitcoin price history and what it may mean for potential buyers, sellers, and holders.

Bitcoin Price History by Year (2014-2026)

Source: Yahoo Finance, CoinDesk

Bitcoin Price 2009-2012: $0 to $13.50

Early Bitcoin price history shows relatively modest growth. As buzz around Bitcoin grew, more crypto-curious individuals began to pay attention to this seemingly novel idea and its potential as a serious vehicle for growth.

2009: $0

On October 31, 2008, the pseudonymous person or group known as Satoshi Nakamoto published the Bitcoin white paper. This paper introduced a peer-to-peer digital cash system based on a new form of distributed ledger technology called blockchain.

Then, on January 3, 2009, the Bitcoin network went live with the mining of the genesis block, which allowed the first group of transactions to begin a blockchain. This block contained a text note that read: “Chancellor on Brink of Second Bailout for Banks.” This referenced an article in The London Times about the financial crisis of 2008 – 2009, when commercial banks received trillions in bailout money from central banks and governments. This event helped mark Bitcoin’s original price at $0.

For this reason and others, many suspect that Nakamoto created Bitcoin, at least in part, in response to the way the events of those years played out.

2010: $0.00099 to $0.30

Bitcoin’s price increased nominally for most of 2010, never surpassing the $1 mark. The first recorded price at which Bitcoin was exchanged was equivalent to roughly one-tenth of a cent, and the year closed with a price near $0.30. The first notable price jump would not be far off, however.

2011 – 2012: $1 to $13.50

Real adoption of Bitcoin began to take place about two years after it was first introduced, and a major Bitcoin price surge happened for the first time.

In 2011, the Electronic Frontier Foundation (EFF) accepted BTC for donations for a few months, but quickly backtracked due to a lack of a legal framework for virtual currencies.

In February of 2011, BTC reached $1.00 for the first time, achieving parity with the U.S. dollar. Months later, the price of BTC reached $10 and then quickly soared to $30 on the Mt. Gox exchange. Bitcoin had risen 100x from the year’s starting price of about $0.30.

By year’s end, though, the price of Bitcoin was under $5. No one can say for sure exactly why the price behaved as it did, especially back when the technology was so new. It could be that 2011 marked the launch of Litecoin, a fork of the Bitcoin blockchain — and other forms of crypto began to emerge as well — signaling greater competition.

In 2012, of course, Bitcoin saw its first halving, from a 50-coin reward for mining BTC to 25 coins. This set the stage for its precipitous growth. But the pattern of an 80% – 90% correction from record highs would continue to repeat itself going forward, even as much more Bitcoin liquidity would come into being.

Recommended: Is Crypto Mining Still Worth It in 2025?

2013 – 2016: $13 to $1,000

The period between 2013 and 2016 would mark the beginning of Bitcoin’s ascension as a cryptocurrency to be taken seriously. Pricing increased dramatically during this time, as more people began to take notice of Bitcoin’s potential.

2013: $13 to $1,193

In 2013, the EFF began accepting Bitcoin again, and this was the strongest year in Bitcoin price history in terms of percentage gains. Starting at $13 in the beginning of the year, the price of Bitcoin rose to almost $250 in April before correcting downward by over 50%. The price consolidated for about six months until another historic rally in November and December of that year, when the price hit $1,193.

This increase saw Bitcoin’s market cap exceed $1 billion for the first time ever. The world’s first Bitcoin ATM was also installed in Vancouver, allowing people to convert cash into crypto.

While the price spiked above $1,000 again briefly in January 2014, it would be nearly three years before the Bitcoin price would reach four digits again.

Amidst all this volatility was a surge in crypto interest, with Dogecoin being one of the more notable coins to emerge at that time. Though considered a meme coin, Dogecoin still exists.

2014 – 2015: $760 to $430

While the cryptoverse quietly exploded in this time period, with technological innovations that permitted a move away from proof-of-work to the less resource-intensive proof-of-stake, as well as the emergence of smart contracts, and the real foundations of decentralized finance — Bitcoin was relatively quiet.

While 2014 opened at about $760, the price overall held steady in the $200 to $500 range for much of this time, briefly dipping below $200 in January and August of 2015. Bitcoin closed out 2015 at $430, marking a period of overall price stability. The official B symbol that has come to be associated with Bitcoin was adopted in November of that year.

2016: $430 to $960

In 2016, Bitcoin halved for a second time, prompting a notable jump in prices by year’s end. January ended the month with a closing price of $368, but by December, Bitcoin’s price had almost reached $1,000. A slight dip in pricing occurred around August, but for the most part, the cryptocurrency saw a steady and consistent rise in price.

2017 – 2019: $960 to $7,200

Between 2017 and 2019, Bitcoin would dazzle crypto watchers with big price leaps, but the outlook was not entirely rosy during this period. In 2018, a major crash would deliver a blow to BTC’s price and raise questions about the stability of cryptocurrency markets as a whole.

2017: $960 to $20,000

The Bitcoin price in 2017 breached the $1,100 mark in January, a new record at the time — following the Bitcoin halving in July of 2016. By December, the price had soared to nearly $20,000. That’s a 20x rise in less than 12 months, and it was followed predictably by a decline through 2018 and 2019. Bitcoin wouldn’t see the other side of $20,000 until late 2020.

Like the 2013 price surge, the 2017 rally occurred about one year after the halving. What made this time different was that for the first time ever, the general public became more aware of cryptocurrency. Mainstream news outlets began covering stories relating to Bitcoin and other cryptocurrencies. This price rise largely reflected retail buyers entering the market for the first time.

Opinions on Bitcoin ranged from thinking it was a scam to believing it was the greatest thing ever. For the believers, this was an opportunity for many to purchase Bitcoin for the first time, but there’s little doubt that the influx of retail interest in the crypto markets contributed heavily to volatility across the board.

2018: $14,000 to $3,700

The year 2018 was an unpredictable one for Bitcoin pricing. Following a relatively strong start in January, with prices closing above $10,000, the cryptocurrency ended the year at $3,742. This period stands out as one of the most significant cryptocurrency crashes, affecting not only Bitcoin but more than 90 other digital currencies that had arisen.

Bitcoin’s decline during this period was attributed to numerous factors, including the launch of several new crypto offerings that quickly fizzled, which triggered fear in the markets.

Apart from these concerns were rumors that South Korea was contemplating banning cryptocurrency, and the hacking of Coincheck, Japan’s largest OTC cryptocurrency exchange network. Combined, these factors created a perfect storm for price drops and criticism of Bitcoin from notable analysts and media outlets.

2019: $3,700 to $7,200

Bitcoin began to see some recovery in 2019, though it was initially slow going. For most of the first quarter, Bitcoin’s price hovered between $3,500 and $5,000, before a surge in June of that year that tipped its price above $13,000.

June saw the cryptocurrency’s price rise above $10,000 again, and Bitcoin held steady throughout July. By August, the tide had begun to turn, and the remainder of the year saw a gradual slide in pricing. In December 2019, Bitcoin closed at $7,193, still well above its January price point but far from the highs reached in 2017.

The next big test of Bitcoin’s strength in the crypto markets would come in 2020, with the arrival of the COVID-19 pandemic.

2020 – 2026: $7,200 to $126,000

The period from 2020 to 2026 would see Bitcoin prices reach their highest levels yet — following one of the worst crashes in the cryptocurrency’s history. Against mounting pressure, Bitcoin would continue to attract new buyers hoping to get exposure to the crypto market.

2020: $7,200 to $29,000

The crypto feeding frenzy was well underway by the end of 2019, with hundreds of new coins on the market. By January 3, 2020, Bitcoin’s price was $7,347 and rising steadily for the most part. As the halving in May of 2020 approached, Bitcoin’s price shot north of $9,100, nearly a 25% increase in just a few months.

But that was just the start of a meteoric rise — and fall — for BTC that few will forget, and a phase of Bitcoin’s story that many tie to the pandemic. With millions of people worldwide confined at home from 2020 through 2021 (in some cases longer), online speculation became a widespread phenomenon. One offshoot of that may have been the biggest Bitcoin bull market to date.

2021: $29,000 to $69,000

In August 2021, the price of Bitcoin was hovering around $46,000, and by November 2021 BTC hit its all-time best over $68,500.

Toward the end of 2021, however, the Bitcoin hash rate, a factor thought to have some correlation to the Bitcoin price, plummeted to around $47,000 — a loss of close to 30%.

The price drop occurred partly as a result of China requiring its citizens to shut down Bitcoin mining operations. The country previously housed a significant portion of the network’s mining nodes. As a result, these computers had to go offline. Many believe this reduction in mining capacity was a key factor weighing on the Bitcoin price.

In addition, politicians and regulators raised concerns about the future of crypto laws and regulations, adding to the general mood that crypto mavens refer to as FUD (fear, uncertainty, doubt) — one of many crypto slang terms now in wider use.

But as 2021 shifted into 2022, the specter of inflation — in addition to the global energy crisis and geopolitical turmoil thanks to Russia’s war on Ukraine — put a drag on the price of BTC and just about every other major crypto.

2022: $47,000 to $16,5000

From January 2022 through May, Bitcoin’s price continued to sag as the Crypto Winter officially took hold. By May, BTC dipped under $30,000 for the first time since July of 2021. June would see Bitcoin’s price move even lower, dropping to $17,708 at its lowest point that month.

What Is a Crypto Winter?

Unlike a bear market, a crypto winter doesn’t have specific parameters or criteria. But, similar to a bear market, it does mark a period of steady and sometimes precipitous losses that pervade the crypto markets as a whole.

Crypto Struggles in the Face of Crises

This downward trend proved to be the case as crypto prices overall declined through Q2 — partly affected by the collapse of stablecoins like TerraUSD and Luna. In June, Bitcoin fell below $20,000.

Crypto prices struggled through Q3 of 2022, and took another hit in November 2022, thanks to the sudden failure of crypto exchange FTX.

The exchange crashed amid a liquidity crunch and allegations of misused funds by its CEO, Sam Blankman Fried. A bailout by Binance was possible, but the deal fell through because of FTX’s troubled finances and implications of fraud.

The rapid downfall of FTX shocked the financial industry, and the crash had a massive ripple effect throughout the crypto market, affecting consumer confidence. Widespread worries about inflation, as well as steady interest rate hikes, affected broader markets. Bitcoin’s price continued to be a gauge of overall crypto health in many ways, plunging below $20,000 by the end of December, 2022.

2023: $16,500 to $44,000

January 2023 saw Bitcoin’s price increase to around $23,300, sparking hopes that the crypto winter had begun to thaw. Meanwhile, other cryptocurrencies began showing similar price patterns in Q1.

The rest of 2023 proved to be fruitful for those who were able to hold on through the crypto winter. At mid-year, Bitcoin’s price had topped $30,000 once again, and while there were some slight declines, the crypto finished the year strong. By December 2023, Bitcoin’s price notched a high of $44,705, before closing the year just above $42,000.

2024: $42,000 to $100,000+

Bitcoin would hit new benchmarks in 2024, breaking the $100,000 mark for the first time. In January of that year, the SEC would allow Bitcoin to be accessed via exchange-traded funds (ETFs), which led to the addition of several new funds to the market.

The introduction of physical Bitcoin ETFs brought major price increases, as crypto users rushed to buy shares. Bitcoin’s price surged to $63,913 in February 2024, then to $73,750 in March.

After this peak, prices would decline slightly, hovering between $65,000 and $73,000 for most of the year. In November, Bitcoin’s price brushed $100,000, before finally surging past that figure in December. That month, it reached $108,268, ending the year at $93,429.

2025: $94,000 to $126,000

Building off the momentum of 2024, Bitcoin continued to push toward new heights for much of 2025. Despite some dips in the first quarter, the cryptocurrency reached its highest price ever on October 6th, cresting $126,198. The price fell back to approximately $87,000 at the end of December.

Part of the increase in 2025 may be attributed to ongoing interest in Bitcoin ETFs, which offer exposure to cryptocurrency without having to buy individual coins. Market sentiment also moved in a more positive direction, thanks in part to the current administration’s stance on cryptocurrency.

In July 2025, U.S. securities regulators announced plans to modernize crypto rulemaking to help pave the way for further innovation in the digital currency space. Dubbed “Project Crypto,” it would mark a major shift in the market with the potential of making the U.S. a leader in the cryptocurrency sector.

Early 2026 : $88,000 to $70,000

In early 2026, Bitcoin’s price experienced more volatility, reaching a high in January of $97,860, but also seeing a low of $60,074 in February, and vacillating between about $65,000 to $73,000 in early March.

The drop in Bitcoin’s price heading into 2026 has led some analysts to believe that the four-year Bitcoin cycle may still be intact. The four-year cycle is a pattern associated with the Bitcoin halving events, described above, where a resulting increase in demand may spur a Bitcoin bull market, followed by a market correction and bear market low, before eventually gaining upward momentum once again.

However, there are other factors that impact Bitcoin pricing and market sentiment, such as monetary policy changes, and other analysts believe the four-year cycle is not as relevant today, given increased regulatory oversight and broader mainstream adoption. While it’s impossible to know which way Bitcoin prices may trend in the near future, being aware of the cryptocurrency’s significant volatility — even within recent months — may help buyers, holders, and sellers determine whether or how it might fit into their portfolio.

The Takeaway

Bitcoin’s historical price records are a mix of surges and setbacks, but even through crashes, it’s continued to attract interest from buyers and sellers.

As the oldest and still the largest form of crypto, BTC has gone from being worth a fraction of a penny to about $126,000 in the fall of 2025, which is nothing short of impressive. However, cryptocurrencies are highly volatile, and past performance doesn’t guarantee future results.

SoFi Crypto is back. SoFi members can now buy, sell, and hold cryptocurrencies on a platform with the safeguards of a bank. Access 25+ cryptocurrencies, such as Bitcoin, Ethereum, and Solana, with the first national chartered bank to offer crypto trading. Now you can manage your banking, investing, borrowing, and crypto all in one place, giving you more control over your money.

FAQ

What was the highest price Bitcoin has ever reached?

Bitcoin reached its highest price in October 2025, when it was briefly valued at $126,198.07.

When was Bitcoin worth $1?

Bitcoin reached $1 in early 2011, after hovering around the $0.30 to $0.40 mark for most of 2010. In mid-2011, the price jumped to $30 before tapering off to around $2 to close out the year.

What was the original price of Bitcoin?

The first recorded price of Bitcoin was $0.00099. This price was notched in 2009, when a BitcoinTalk forum member exchanged 5050 Bitcoin with another forum member for $5.02 through PayPal.

If you bought $1,000 in Bitcoin 10 years ago, how much would it be worth today?

If you bought $1,000 in Bitcoin 10 years ago in 2016, your Bitcoin would be worth approximately $153,550, as of March 2026. That would equate to a 15,355% rate of return on your money.

How many times has Bitcoin “crashed”?

Historically, Bitcoin has crashed nearly a dozen times, with some of the most notable crashes occurring in June 2011, April 2013, and December 2017. Bitcoin crashes occur when there are extreme price fluctuations that cause sharp declines. These fluctuations may be driven by market speculation, regulatory concerns, and macroeconomic factors, such as talk of interest rate hikes or rising inflation.

What is the significance of the Bitcoin halving?

Bitcoin halving is designed to reduce the supply of new Bitcoins entering the market. Halving occurs every four years and cuts the number of new coins created by 50%. The theory behind halving is that scarcity should lead to price appreciation if demand for Bitcoin remains high.

Photo credit: iStock/simarik

SOCRYP-Q126-001

With most things in life, it helps to be covered — by a coworker, an insurance policy, or a roof over your head. In investing, it can also be helpful to have coverage through specific strategies. A covered call is an options trading strategy that involves selling call options on stocks you already own, with the goal of generating income. It is typically appropriate to use when an investor has a neutral to slightly bullish outlook on the underlying stock.

Here’s a breakdown of how a covered call strategy works, when to consider it, and how it may — or may not — perform depending on market positions.

What Is a Covered Call?

A covered call is an options trading strategy used to generate income by selling call options on a security an investor already owns or decides to purchase. This strategy can be beneficial to the investor if they expect the stock’s price to experience limited movement or remain neutral, though it may limit potential gains if the stock rises sharply above the strike price.

Call Options Recap

A call is a type of option that gives purchasers the right, but not the obligation, to buy shares of an underlying asset or stock at a specific, prearranged price, called the strike price. A call is in contrast to a put option, which gives buyers the right, but not the obligation, to sell the underlying asset at the strike price.

An investor who purchases a call option holds a long position in the option — that is, they anticipate that the underlying stock may appreciate. For example, an investor who anticipates a stock’s price increase might buy shares, hold them, wait for appreciation, and — assuming they do appreciate — sell them to potentially realize a gain.

Call options allow options buyers to pursue a similar strategy without buying the underlying shares. Instead, a premium is paid for the right to buy the shares at the strike price, allowing buyers to profit if the market price rises above the strike price.

Call option writers (or sellers), on the other hand, typically sell call options when they anticipate that the price of the underlying asset will not rise above the strike price, allowing them to keep the premium, or price they collected for selling the option, when the option expires worthless.

What’s the Difference Between a Call and a Covered Call?

The main difference between a regular call and a covered call is that a covered call is “covered” by an options seller who holds the underlying asset. That is, if an investor sells call options on Company X stock, it would be “covered” if they already own an equivalent number of shares in Company X stock.

Conversely, if an investor does not own any Company X stock and sells a call option, they’re executing what’s known as a “naked” option, which carries a much higher risk because losses can theoretically be unlimited if the stock rises sharply. The covered call strategy combines and leverages the owned stock to limit risk and allow them to sell a call to collect premium.

In a covered call, the seller’s maximum profit is limited to the premium plus any stock appreciation up to the call’s strike price, while the maximum loss equals the price paid for the stock minus the premium received.

In contrast, in a portfolio where the investor is only holding the stock, the maximum profit is theoretically unlimited, based on how high the stock price trades minus the price paid for the stock. The maximum loss is the price paid for the stock minus the stock’s lowest trading price (theoretically zero, which would equal the whole value of the position).

It’s worth noting that similar to only holding stock, the losses with covered calls would also be substantial if the price of the stock purchased were to fall to zero and became worthless. However, the premium received from the call option sold may cushion the loss to a certain extent.

Example of a Covered Call

The main goal in employing a covered call trading strategy is typically to generate income from existing (or newly acquired) stock positions. If, for example, you have 100 shares of Company X stock and were looking for ways to pursue additional income, you might consider selling a covered call.

Here’s what that might look like in practice:

Your 100 shares of Company X stock are worth $4.77 each, or $477 at the current market value. To make a little extra money, you decide to sell a call option with a $0.08-per-share premium at a strike price of $5.50 and 21 days to expiration. Since standard options contracts typically represent 100 shares, you receive a total of $8 for the option.

Let’s say that Company X stock’s price only rises to $5, so it expires worthless. In this scenario, you’ve earned a total of $8 by the selling covered call option, and your shares have also appreciated to a value of $500. So, you now have a total of $508.

Max Profit: The ideal outcome in this strategy is that your shares rise in value to the strike price of $5.50. In that scenario, you still own your shares (now worth $550) and get the $8 premium. Your profit is $81 ($558 – $477).

Capped Gain Risk: One risk of selling covered call options is that you might forgo higher gains if the stock exceeds the strike price. In this scenario, let’s assume the stock price rises above the strike to $6. The 100 shares of stock held is now worth $600, but since the option was exercised in the money at $550, the strategy will sell the stock for $550 and miss out on the extra $50 ($600 – $550) of stock appreciation value.

While this risk is slightly offset by the $8 collected by selling the option, it is easy to see that for each dollar increase above the strike price, the strategy will miss out on that gain. Effectively, you still have turned a holding valued at $477 into $558, but missed the extra gain of $50 beyond the strike price. This illustrates the trade-off involved in selling covered calls: capped upside in exchange for income.

Max Loss: Another risk of selling covered call options is that the stock price may drop. In this scenario, let’s assume the stock price drops to $4.00. The 100 shares of stock held is now worth $400. Your loss is -$77 ($400 – $477). This risk is slightly offset by the $8 collected by selling the option.

In a worst case scenario, the stock price could move to $0 and you could lose the entire stock value, while keeping the $8 premium you received by selling the covered call. If your long term outlook on the stock was positive, then you may still be OK holding the stock at this lower price level. If you only purchased the stock to support the covered call strategy, this loss would be realized as a loss of the capital invested.

Break Even: If the stock price drops by the amount of the premium, the investor breaks even on the trade. In this scenario $4.69 ($4.77 – $0.08) as the break-even stock price.

Income Generated: When selling a covered call, the premium received is income to the portfolio. In this scenario, the income generated is the premium of $8, which is realized at the time the call is sold.

Recommended: How to Sell Options for Premium

How to Sell a Covered Call: A Step-by-Step Example

A covered call strategy consists of a defined sequence of steps that combine owning (or purchasing) a stock while also selling a call option against it. Here’s how to implement the strategy in a way that may help you generate additional income from your stock holdings.

Step 1: Own at Least 100 Shares of an Underlying Stock

First, you first need to own at least 100 shares of the stock you intend to write the call option upon. This minimum is required since options contracts typically represent 100 shares of the underlying security. Owning these shares is what “covers” your obligation if the call buyer decides to exercise the option.

Step 2: Sell-to-Open One Call Option Contract

Once you hold the required shares, you place a sell-to-open order for a call option against those shares. This creates an obligation for you to sell your shares at the specified strike price if the option buyer chooses to exercise the contract.

Step 3: Choose a Strike Price and Expiration Date

Selecting the strike price and the expiration date is a key decision in covered call writing.

•   Strike price: Choose a price above the current market price if you want to retain some upside potential while collecting premium.

•   Expiration date: Shorter expirations (e.g., 30–60 days) can offer frequent income opportunities, but may require more active management. Longer expirations typically provide higher premiums but may tie up your shares longer.

Both choices depend on your outlook for the stock and your income goals.

Step 4: Collect the Premium

After submitting the sell-to-open order, you’ll receive the option premium — the cash payment from the buyer of the call option. This premium is yours to keep regardless of whether the option is exercised. It effectively increases your total return on the stock during the period you wrote the call.

Step 5: Manage the Outcome at Expiration

When the call option approaches expiration, there are a few possible outcomes:

•   Option expires worthless: If the stock stays below the strike price, the option likely expires worthless and you keep both your shares and the premium.

•   Option is exercised: If the stock price rises above the strike price, the buyer may exercise the option. You would then sell your shares at the strike price and still keep the premium received.

•   Rolling the option: Some investors choose to buy back the expiring call and sell a new one with a later expiration or different strike price if they want to continue generating income without losing their shares.

Key Decisions When Selling Covered Calls

There are a number of factors that could influence the value of an option. When writing a covered call and choosing the contract’s strike price and expiration, it’s important to understand the fundamentals of how options are priced.

Basic Options Valuation

When determining an option’s strike price and expiration, it is helpful to break down an option’s value into two main value buckets: intrinsic value and extrinsic value. An option’s price is the sum of its intrinsic value and extrinsic value:

•   Options price = intrinsic value + extrinsic value.

An option’s intrinsic value is the tangible value that would be realized if it was exercised in the current moment. For a call option, it is the difference between the current price of the option’s underlying stock price and the option’s strike price.

•   Call Option Intrinsic Value = Current price of underlying stock – strike price

An option’s extrinsic value is the difference between its market value and intrinsic value. An option’s estimated market value is influenced by its time until expiration and the anticipated volatility of the stock price between now and expiration.

As the time until expiration decreases, the time value of the option will decay since there is less time for the stock’s price to potentially move above the strike and put the call option in the money. This concept is called time decay.

In a covered call, the writer typically wants the option’s time value to decay to zero so they are able to keep the full premium. One other thing to note is that the closer the strike is to the current stock price, the more extrinsic value there will be in the option. This is because the option requires a smaller stock price movement to become in the money.

As with any trade, the decision comes down to a risk vs. reward tradeoff. The reward is the amount of premium that will be collected and the risk is the likelihood that the stock price will go above the strike price or fall below the value of the premium collected in the days leading up until expiration.

Choosing a Strike Price

In terms of the strike price, there are a few potential considerations an investor might evaluate. Typically, the investor would sell an out-of-the-money call to give the stock price room to move upward before they would be obligated to sell it.

1.    The investor should generally be aware that as an option’s strike price becomes further away from the current stock price, there will be a smaller chance that the option may expire in the money, thus reducing that option’s value (the premium that could be received when selling the option contract).

2.    The investor might have a target price where they would be willing to sell the stock if it reached that level. Using this price as the strike price would meet that target.

3.    The investor might have a feel for the range of prices they believe the stock will stay between based on historical pricing, fundamentals, upcoming events, or other insights.

4.    The investor might not want to sell a call that is already in the money unless they have a belief that the stock price will go down before expiration, or if they are willing to sell the stock at a loss to the current stock price in order to collect more premium than an out-of-the-money call would provide.

Choosing an Expiration

In terms of the expiration date, there are also a few potential considerations an investor might evaluate. Typically, the investor would sell a call that is between 15-60 days from expiration to balance the tradeoff between premium received vs. the time and volatility value or amount of time for the stock price to move.

1.    The investor should generally be aware that as the expiration becomes further into the future, there will be more time for the stock price to move. That will typically translate into an increased options value or premium that could be received when selling the contract.

2.    It’s possible that short duration contracts may not yield enough premium income to overcome the risk of a quick, unexpected stock price movement.

3.    The investor might not want to have the prolonged exposure of a long-duration covered call, or they may notice that there is a diminishing return value for selling option contracts that expire too far into the future.

4.    The investor might know that an event is coming up and want to ensure their covered call is not exposed to the potential price movement from that event.

Final Decision and Selling the Call

In practice, the covered call writer will want to look at the options chain to see the tradeoffs between the amount of premium they can receive or the potential reward for the risk associated with trading an option with a particular strike and expiration. The investor will use these inputs along with the other objectives they have for their portfolio and choose a call to sell.

When selling a covered call, note that you will be able to sell one call for every 100 shares of stock in your portfolio. In order to keep the strategy balanced, you can either buy more shares of the stock and sell more covered calls or sell less covered calls.

💡 Quick Tip: When selling an option on SoFi’s option trading platform, the SoFi app will guide you through the process and let you know if you are trying to sell more calls than you have the stock to cover.

What Are the Risks and Rewards of Covered Calls?

Using a covered call strategy could serve specific purposes for income generation or risk management. As with any trading strategy, investors need to keep in mind that covered call gains (along with any other gains or losses realized by the strategy) are subject to capital gains taxes.

Here are several pros and cons of the covered call strategy to consider.

Potential Rewards

The benefits of utilizing covered calls include the potential to receive added income and offset downside risk.

•   Investors can earn income by keeping the premiums they collect from selling the options contracts. Depending on how often they sell covered calls, this can lead to recurring income opportunities.

•   Investors can determine an adequate selling price for the stocks they own and use that for the strike of the call option to be sold. If the option is exercised, an investor will realize their intended profit from the sale (as well as the premium).

•   The premium the investor receives for the sold call will help offset a potential decline in a stock’s price. This provides limited downside protection, though losses can still occur.

•   Covered calls may be permitted in certain IRA accounts, subject to account eligibility and approval requirements.

Potential Risks

There are also a few drawbacks to using a covered call strategy:

•   Investors could forgo additional upside if a stock’s price rises, and continues to rise, above the strike price. This is an inherent trade-off of the strategy that was described above. Investors that sell covered calls must accept the obligation to sell the stock at the strike price if the buyer exercises the option.

•   Since the sold call is covered by the stock, an investor would need to buy back the covered call option they sold before they may sell their stocks on the market. This limits the investor’s flexibility to respond to price movements. (Be aware that uncovered calls present too much risk in SoFi member portfolios and are not allowed.)

What Is the Best Market Environment for a Covered Call?

There is no single correct time to use a covered call strategy — as with any trading strategy, it depends on evaluating the market environment and weighing the potential risks vs. the rewards of the premium income that could be generated. When an investor is holding a long stock position that they are planning to keep long-term, this is one key consideration. In terms of stock sentiment, there are three cases where an investor might choose to write a covered call.

1.    When they feel the stock price will remain neutral.

2.    When they feel the stock price will rise some, but not dramatically.

3.    When they feel the stock price will rise dramatically and they are comfortable with the capped gain at the strike price (plus the premium received) where they might sell the covered call.

4.    When they feel the stock price might drop temporarily, but their long term outlook for the stock is positive or neutral. Since market outcomes are uncertain, investors should be ready and willing to accept the risk considerations outlined above.

As for why an investor might use covered calls? The goal is often to generate income from existing or purchased stock holdings. Another potential reason to use covered calls, for some investors, is to offset some risk using the premium received.

The Takeaway

A covered call may be attractive to some investors as it’s a way to generate additional income from a stock position. That said, as with all trading strategies, outcomes may vary based on market conditions and timing. There are no guarantees, and the strategy involves trade-offs between income potential and capped gains.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

FAQ

Are covered calls free money?

Covered calls are not “free money.” They can generate income from the premiums received for the covered call, but they can also limit upside potential if the stock’s value increases significantly or the option is exercised when the price rises toward the strike.

Are covered calls profitable?

Covered calls can allow you to generate income, but results depend on the performance of the underlying stock and the terms of the option contract. If the option expires unexercised, the seller keeps the premium and the stock. The strategy tends to work best in neutral to moderately bullish markets, and profitability may depend on strike price and expiration the seller has chosen.

What happens when a covered call expires?

If a covered call expires without being exercised, nothing happens: the option just expires worthless. The seller keeps the premium received, which is a benefit of the strategy. Because an option is only that — an option to execute a trade at a predetermined price for a select period of time — if the stock price remains below the strike price the option will expire worthless.

If the stock price goes above the strike price, the option’s buyer will exercise the option. This obligates the option writer to sell their stock at the strike price. This technically happens the evening of expiration and on the following trading day, the covered call seller will have cash to replace the stock and the option position will no longer exist. With this cash, the trader can choose to re-buy the stock or use it the same as any settled cash position.

Can you make a living selling covered calls?

Living strictly off income from covered calls may be theoretically possible, but it would likely require a large portfolio to make it work. There are other factors to consider, too, like potential capital gains taxes and the fact that the market won’t always be in a favorable environment for the strategy to work.

What is the maximum profit on a covered call?

The maximum profit is the premium received plus any stock gains up to the strike price. Gains above the strike are capped, however, since the shares may be called away at (or potentially below) the strike if the option is exercised.

About the author

Samuel Becker

Sam Becker is a freelance writer and journalist based near New York City. He is a native of the Pacific Northwest, and a graduate of Washington State University, and his work has appeared in and on Fortune, CNBC, Time, and more. Read full bio.

Photo credit: iStock/millann