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A six-figure salary is often associated with a comfortable lifestyle, and for many workers, reaching that threshold is a dream come true. If you’re a single person earning $100,000 a year, you may find that you have more than enough to cover your basic needs, with money left over for short- and long-term financial goals.

But it’s worth noting that salaries don’t go as far as they used to. The rising cost of living, shifting economic conditions, and individual spending habits and financial obligations can all play a role.

Let’s take a closer look.

Is $100K a Good Salary?

Generally speaking, $100,000 is a good six-figure salary for a single person. Before taxes, $100,00 works out to roughly $8,333 per month. Whether that’s enough for you depends largely on where you live. Savings, property ownership, and discretionary funds may be achievable in an area with a low cost of living. But in a more expensive area, that same salary won’t go as far because housing, transportation, and other necessities all cost more.

A money tracker can provide a bird’s-eye view of your spending and saving, and help ensure you’re staying on track financially.

Average Median Income in the US by State in 2024

In 2024, the average pay in the U.S. was $69,846.57, according to the Social Security Administration. But wages vary greatly by state, reflecting regional differences in the cost of living and economic inequality.

States such as California, Maryland, and Massachusetts, which have robust economies and a high cost of living, generally report higher median salaries, frequently topping $100,000 annually. Average annual income in states such as West Virginia, Arkansas, and Mississippi, which have a lower cost of living, is typically closer to $60,000. The presence of certain industries, job opportunities, and state-specific laws all contribute to differences in pay.

Here’s a look at the median household income in each state, per U.S. Census Bureau data.

State	Median Household Income
Alabama	$66,659
Alaska	$95,665
Arizona	$81,486
Arkansas	$62,106
California	$100,149
Colorado	$97,113
Connecticut	$96,049
Delaware	$87,534
Florida	$77,735
Georgia	$79,991
Hawaii	$100,745
Idaho	$81,166
Illinois	$83,211
Indiana	$71,959
Iowa	$75,501
Kansas	$75,514
Kentucky	$64,526
Louisiana	$60,986
Maine	$76,442
Maryland	$102,905
Massachusetts	$104,828
Michigan	$72,389
Minnesota	$87,117
Mississippi	$57,127
Missouri	$71,589
Montana	$75,340
Nebraska	$76,376
Nevada	$81,134
New Hampshire	$99,782
New Jersey	$104,294
New Mexico	$67,816
New York	$85,820
North Carolina	$73,958
North Dakota	$77,871
Ohio	$72,212
Oklahoma	$66,148
Oregon	$85,220
Pennsylvania	$77,545
Rhode Island	$83,504
South Carolina	$73,530
South Dakota	$76,881
Tennessee	$71,997
Texas	$79,271
Utah	$96,658
Vermont	$82,730
Virginia	$92,090
Washington	$99,389
West Virginia	$60,798
Wisconsin	$77,488
Wyoming	$75,532

Average Cost of Living in the US by State in 2024

It’s not just you: Goods and services have gotten more expensive, thanks in part to inflation. Depending on where you live, you may be paying more for housing, transportation, food, health care, and other necessities compared to someone in a neighboring town or state.

One way to determine whether $100,000 is enough for you to live on is to look at your cost of living. The cost of basic necessities varies by location, and this is often reflected in salaries. Areas with higher wages tend to have higher costs of living, while areas with a lower cost of living have lower wages.

With that in mind, here’s a look at what the average resident in each state spends on basic necessities, according to data from the U.S. Bureau of Economic Analysis.

State	Average Cost of Living
Alabama	$47,096
Alaska	$66,356
Arizona	$56,211
Arkansas	$46,259
California	$67,565
Colorado	$66,448
Connecticut	$66,645
Delaware	$60,131
Florida	$62,618
Georgia	$52,806
Hawaii	$60,711
Idaho	$48,098
Illinois	$60,612
Indiana	$51,821
Iowa	$49,473
Kansas	$51,082
Kentucky	$48,901
Louisiana	$50,454
Maine	$63,046
Maryland	$58,310
Massachusetts	$71,946
Michigan	$54,197
Minnesota	$58,433
Mississippi	$43,947
Missouri	$54,405
Montana	$58,499
Nebraska	$54,512
Nevada	$56,103
New Hampshire	$68,900
New Jersey	$65,873
New Mexico	$48,119
New York	$66,426
North Carolina	$53,334
North Dakota	$58,090
Ohio	$52,708
Oklahoma	$46,319
Oregon	$58,150
Pennsylvania	$59,260
Rhode Island	58,041
South Carolina	$51,423
South Dakota	$54,100
Tennessee	$51,507
Texas	$54,060
Utah	$52,677
Vermont	$62,629
Virginia	$58,224
Washington	$62,837
West Virginia	$50,286
Wisconsin	$54,705
Wyoming	$55,543

How to Live on a $100K Salary

Even if a $100,000 salary is more than enough to cover your expenses, it’s still a smart move to create a budget. Having a plan for where your money is going can help keep unnecessary spending in check and allow you to make progress toward your financial goals.

The first step is to ensure your budget can cover your necessities, such as housing, utilities, groceries, and transportation. Next, set aside money for short- and long-term savings goals, such as retirement or buying a home, and debt repayment. Finally, carve out funds for discretionary spending to ensure you’re able to enjoy a balanced lifestyle without going over your budget.

How to Budget for a $100K Salary

There’s no one-size-fits-all approach to making a financial plan and there’s no shortage of budgeting methods to explore.

One popular option is the 50/30/20 approach. Here, you earmark 50% of your budget to needs (think housing, transportation, food); 30% to wants (travel, entertainment); and 20% to savings and debt repayment.

Prefer something more straightforward? Consider a line-item budget. This requires you to list all your expenses, or categories of expenses, over a period of time, such as a month or year, and assign a spending target to each one. Then, every month, you can compare current expenses to past expenses to ensure you’re staying on track.

Of course, life changes, and you’ll want to review and adjust your budget regularly to make sure it’s in line with evolving goals and circumstances. A budget planner app can help you create a new budget, categorize spending, and monitor your credit score.

Maximizing a $100K Salary

There are ways to get more out of a $100,000 salary. Here are a few strategies to try:

•   Prepare for the unexpected. Once you’ve paid for your monthly expenses, dedicate some of the remaining amount to building up an emergency fund. A good rule of thumb is to save enough to cover three to six months’ worth of expenses.

•   Save for retirement. After your emergency fund is established, direct some funds to your retirement savings account. Crunch the numbers and see if you can contribute more, and find out if you qualify for a company match.

•   Improve your credit. Check your credit score, and if the number isn’t where you want it, look for ways to improve it. Steps may include setting up a system to ensure your bills are paid on time, routinely checking your credit report for errors, and keeping your credit utilization low.

Quality of Life with a $100K Salary

Whether it’s an entry-level salary or a pay upgrade earned after several years on the job, $100,000 can offer a good quality of life for many people. This amount is typically enough for the basics with some left over for enjoyment and long-term savings goals, such as buying a home, retirement, or continuing education.

That said, the quality of life on a $100,000 salary varies based on factors such as living expenses in your area, your financial obligations, and whether you support anyone else.

Is $100,000 a Year Considered Rich?

There’s no single definition of how much someone must earn to be considered rich. So much comes down to factors such as cost of living, location, and your individual financial situation. Someone who makes $100,000 a year, has a low cost of living, and is investing and saving might feel financially better off compared to those who make the same amount but live in high-priced cities such as New York, San Francisco, or Los Angeles.

Bottom line: Even though $100,000 a year might not put you in the highest echelons of wealth, it typically provides a stable, comfortable lifestyle.

Recommended: How to Calculate Your Net Worth

Is $100K a Year Considered Middle Class?

Middle class is defined as income that is two-thirds to double the national median income, or $55,402 and $163,208. By that definition, $100,000 is considered middle class.

Keep in mind that those figures are for the nation as a whole. Each state has a different range of income levels to be considered middle class. In Spokane, WA, for instance, a middle-class household needs to earn between $66,259 and $198,778 per year. In Jackson, MS, the range is $39,418 and $118,254.

Example Jobs that Make About $100,000 a Year

Wondering which jobs come with a six-figure salary? Here are some professions that pay around $100,000 per year, according to the Bureau of Labour Statistics — some of which could be a good fit for introverts:

•   Physical Therapist: $101,020

•   Administrative Manager: $$106,880

•   Computer Systems Analyst: $103,790

•   Mathematicians and Statisticians: $104,350

•   Sociologist: $101,690

Recommended: 25 Highest Paying Jobs in the US

The Takeaway

In many ways, earning $100,000 can feel like achieving a major professional milestone. And in many places, it can certainly provide a comfortable, middle-class lifestyle with room for savings, investments, and discretionary income. However, in expensive cities, you may find that $100,000 covers the basics but doesn’t leave much left over. Creating a budget you can stick to can go a long way toward helping you maximize your salary.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

Can I live comfortably making 100K a year?

Yes, you can live comfortably on $100,000 per year, though how comfortable you are will depend on a variety of things, including where you reside, your lifestyle, and your financial commitments.

What can I afford with a 100K salary?

If you make $100,000 a year, you can save money for investments and savings, as well as afford adequate health care, dependable housing, and occasional travel and entertainment.

How much is 100K a year hourly?

Assuming a 40-hour work week and working 50 weeks a year, a $100,000 salary is equivalent to about $48 per hour.

How much is 100K a year monthly?

Before taxes, a $100K wage works out to about $8,333 per month.

How much is 100K a year daily?

A $100K wage, assuming a regular five-day workweek and working 50 weeks a year, is roughly $384 every day.

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Photo credit: iStock/Pekic

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It may be possible to pay some or all of your bills with a credit card. Using a credit card in this way can help you earn rewards like cash back and travel points.

But it’s not always the right financial move. Keep reading to learn what bills you can pay with a credit card and how using a credit card to pay bills works.

Can You Pay Bills With a Credit Card?

Yes, it is possible to pay certain bills with a credit card. However, using a credit card responsibly is key.

When using a credit card to pay bills, it’s important to make sure doing so won’t cause you to rack up a high balance. Paying bills with a credit card makes the most sense when you can easily pay off your credit card balance in full right away.

If done responsibly, a card holder can earn credit card rewards — like cash back, travel points, and gift cards — for spending on purchases they have to make every month without paying interest. Plus, making regular, on-time payments can help build your credit profile.

When Should You Not Use a Credit Card to Pay Bills?

As great as the potential to earn rewards is, if someone can’t afford to pay their credit card balance, charging their bills can lead to high interest charges and late fees (which are two ways credit card companies make money). High-interest credit cards have an average APR of about 20%–25%, and credit card interest typically compounds daily using a daily interest rate, all of which means debt can build up quickly when balances are carried.

It also might not make sense to pay bills with a credit card if it leads to paying an extra fee from the merchant.

💡 Quick Tip: Credit card interest caps have become a hot topic, as the total U.S. credit card balance continues to rise. Balances on high-interest credit cards can be carried for years with no principal reduction. A SoFi personal loan for credit card debt may significantly reduce your timeline, however, and could save you money in interest payments.

What Bills Can You Pay With a Credit Card?

There are limitations on which bills you can pay with a credit card. And, as mentioned, you may owe a fee for using a credit card to pay bills, which could outweigh the benefits earned.

Here are nine examples of bills you may be able to pay with a credit card, as well as explanations on how paying these bills with a credit card works.

1. Streaming Services

Streaming services typically accept credit card payments to cover the monthly cost of the subscription. Paying for a streaming service with a credit card typically involves logging into your account, navigating to the “Account” or “Billing” section, and selecting “Add/Update Credit Card” to input your card details. The card will then automatically get charged each month unless you cancel or suspend your membership.

Streaming services generally do not charge an extra fee if you choose to pay your bill by credit card.

2. Utilities

Some utilities providers allow credit card payments, so it’s worth investigating this option to determine if it’s accepted. If your utility provider will take a credit card payment, then setting it up is usually as simple as providing your credit card number when you pay your bill online, over the phone, or through the mail. You can often set up autopay as well.

However, watch out for the additional convenience and processing fees that some providers may charge. Higher bills are more likely to offset this fee given the greater earning potential for credit card points or other rewards.

3. Cable

Cable is another bill you can typically pay with a credit card. To determine how to do so, you’ll want to consult your cable provider. You may be able to enter your credit card number on the online payment portal or provide this information over the phone. Setting up autopay is also usually an option with a credit card.

There is typically no additional processing fee to pay cable bills.

4. Phone

Another bill you might be able to pay with your credit card is your cell phone bill. You can likely set this up online on your provider’s website or by giving them a call. If you’re unsure of how to pay bills with a credit card, simply consult your plan provider.

You’ll typically face no additional processing fees.

5. Internet

Your internet service is another bill that you can often cover using your credit card. As with other utilities and services, consult your internet provider if you need assistance getting this set up. In general, however, you can do so through your online payment portal. If you don’t want to go through the legwork each month, you can usually set up autopay with your credit card.

Internet providers typically won’t charge an additional processing fee to pay your bill with a credit card, meaning those costs won’t cut into any rewards you earn with a cash back credit card or other type of rewards credit card.

6. Rent

Landlords typically don’t allow credit card payments, but there are third-party solutions that allow you to pay your rent with a credit card. This includes services such as Plastiq and PlacePay, which act as intermediaries.

However, you’ll generally pay a convenience charge or other fees. You’ll want to assess whether the benefits of using your credit card to pay rent outweigh the costs.

7. Mortgage

Mortgage servicers generally don’t allow credit card payments. However, there are third-party payment processing services through which you could pay your mortgage. Still, some credit card issuers may prohibit you from paying your mortgage through these services.

In addition to restrictions, you’ll want to look out for processing fees. These could cancel out any rewards you could earn from covering your mortgage with a credit card.

8. Taxes

It is possible to pay some taxes with a credit card. The IRS allows you to pay on its website using a credit card. However, you’ll face a processing fee ranging from 1.75% to 1.85%, depending on which payment processor you select. If you opt to file and pay using third-party tax software, your fee could be even higher.

9. Medical Bills

While you can pay medical bills with a credit card, it might not be the most cost-effective option. Many medical providers may offer interest-free or low-interest payment plans, or a personal loan could offer a lower rate than a credit card.

If you do think the rewards and convenience of using a credit card is worth the risk, the process of paying bills with a credit card will vary by medical institution. Before charging your medical bills to a credit card, you may want to at least try to negotiate medical bills down.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

Benefits of Paying Bills With a Credit Card

There are a few key benefits associated with paying bills with a credit card.

1. Ease of Payment

It may be possible to pay a bill with a credit card online, in an app, or over the phone.

2. Easy to Prove Payment

If a payment dispute arises, paying by credit card is an easy way to keep a record of payments.

3. Fraud Protection

Paying bills with a credit card offers stronger fraud protection than using a debit card or a direct bank transfer. If you spot a suspicious charge, the issuer will typically remove it from your statement and investigate the claim on your behalf, so you don’t have to pay for it while the issue is resolved.

4. Autopay

It’s easy to use a credit card to set up autopay for bills so you never accidentally forget to pay them.

5. Can Build Credit History

Given how credit cards work, using a credit card to make payments and then paying that balance off on time and in full can help you build your credit.

6. Earn Rewards

Paying your bills with a credit card can help you earn cash-back rewards and credit card points.

Downsides of Paying Bills With a Credit Card

There are also some downsides to paying bills with a credit card that are worth keeping in mind.

1. May Cost More

Because many bill services charge fees to pay with a credit card, it’s possible to spend more than necessary on processing fees.

2. Can Lead to High-Interest Debt

If you can’t afford to pay off your credit card balance after using it to pay for bills, you can end up with high-interest debt on your hands. As mentioned, debt can accrue quickly on credit cards with high, compounding interest rates, and it’s unfortunately not an uncommon situation to be in. In the United States, the total credit card balance recently rose to $1.23 trillion.

In fact, credit card interest caps have become a hot topic, including a proposal for a temporary 10% cap on credit card interest rates. While opinions are divided on interest rate caps, one increasingly popular option is applying for a personal loan. Personal loans interest rates average 10-12%, compared to 20%-25% for credit cards, and they have predictable, fixed terms.

3. Processing Fees Can Cancel Out Rewards

It’s important to do the math to make sure that the cost of processing fees isn’t canceling out the cash back you’re earning with the purchase.

4. Leads to Another Bill to Pay

Similar to when you pay a credit card with another credit card, paying a bill with a credit card simply leads to another bill to pay. This can cause more hassle than it’s worth.

5. Can Hurt Credit Utilization Ratio

Carrying a higher balance on a credit card can lead to a higher credit utilization ratio, which can be damaging to your credit. One common credit card rule of thumb is to keep your utilization below 30%, meaning you’re not using more than this percentage of your total available credit at any given time.

Recommended: What Is a Charge Card?

Guide to Using a Credit Card to Pay Bills

At this point, it’s clear that it is possible to pay some bills with a credit card. But should you? In short, it depends.

If the bill provider won’t charge a processing fee and you can afford to pay off your credit card balance in full, then paying bills with a credit card can be a great way to earn rewards and potentially build credit.

However, in many cases, the processing fee some merchants charge can outweigh the value of cash back or other rewards earned. And carrying a credit card balance can lead to incurring expensive interest and fees.

The Takeaway

The decision to pay bills with a credit card hinges on two main factors: whether the provider charges a processing fee and your ability to pay the full credit card balance on time. If you can avoid fees and pay your statement in full, using a credit card for bills can be a smart way to earn rewards and build credit. However, high processing fees or carrying a balance that accrues high-interest debt can quickly negate any potential benefits.

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FAQ

Should I put non-debt bills on a credit card?

Paying non-debt bills like streaming, cable, phone, and internet with a credit card can be a smart move, if the provider doesn’t charge a processing fee and you can afford to pay the credit card balance in full each month.

When done responsibly, you can earn credit card rewards (like cash back or points) and potentially build your credit history without accruing high-interest debt. However, you should avoid using a credit card for bills that incur high processing fees or if you are unable to pay off the balance on time and in full.

Is it wise to pay monthly bills with a credit card?

Generally, paying monthly bills with a credit card can be wise if you can consistently pay the full credit card balance on time. This approach allows you to earn rewards, such as cash back or points, and can help build a positive credit history. However, it is not wise if the bill charges a processing fee that cancels out the rewards, or if you anticipate carrying a balance, which can lead to high-interest debt.

Is it better to pay bills with a credit or debit card?

Paying bills with a credit card is generally better than using a debit card because credit cards generally offer more robust fraud protection. Additionally, using a credit card responsibly can help you earn rewards and build your credit history, benefits a debit card does not offer.

Should I pay off my credit card in full or leave a small balance?

Paying off your credit card in full each month is the wisest financial move. This allows you to avoid interest charges, as credit cards typically offer a grace period between the statement date and the due date. By paying the entire balance, you can save money, maintain a good credit utilization ratio (which can positively impact your credit), and enjoy any earned rewards without the cost of high-interest debt. Leaving a small balance is unnecessary and only results in paying interest.

What happens if you pay the full amount on your credit card?

When you pay your entire statement balance by the due date every month, you benefit from a grace period. This is the window between the end of a billing cycle and the payment due date during which the issuer does not charge interest on new purchases. This means you are effectively using the card interest-free, maximizing any rewards earned, and maintaining a healthy credit utilization ratio, which can positively impact your credit.

Does paying a bill with a credit card count as a purchase?

Yes, paying a bill with a credit card typically counts as a purchase. This means the transaction will be subject to the card’s terms, including earning rewards like cash back or points, and contributing to your credit utilization.

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Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

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.

Explore SoFi’s user-friendly options trading platform.

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.

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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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