What is a covered call?
In one line: A covered call is owning 100 shares of a stock and selling a call option on them. You collect a premium and agree to sell at the strike if asked.
How it works
You own 100 shares at $50. You sell one Call option with a $55 Strike price, expiring in about a month. A buyer pays you $1.50 per share for it, so you collect a premium of $150.
In return, you've agreed to sell your 100 shares at $55 if the buyer wants them. The shares "cover" that promise.
What can happen at expiry
| Stock at expiry | What happens | Result per 100 shares |
|---|---|---|
| $45 | Call expires. You keep shares and $150 | −$500 on shares + $150 = −$350 |
| $50 | Call expires. You keep shares and $150 | +$150 |
| $60 | Shares sold at $55 | +$500 + $150 = +$650 (the cap) |
- Break-even: $50 − $1.50 = $48.50.
- Max gain: ($55 − $50 + $1.50) × 100 = $650, however high the stock goes.
- Max loss: if the stock went to $0: ($50 − $1.50) × 100 = $4,850.
A math example, not a promise. Commissions left out. Check any version in the options profit calculator.
Why it matters
A covered call trades upside for a premium. The $150 cushions a small drop. But it does almost nothing in a big drop, and it caps your gain if the stock rallies hard.
So the main risk is still the stock. You hold almost all of the downside of owning shares.
A common mistake
Thinking it's a safe add-on. The premium is small next to what the shares can lose. If the stock falls 30%, the call barely helps.
The other surprise is Assignment. If the stock is above $55, your shares can be called away, sometimes before expiry. Only sell a call at a strike where you'd be fine selling.
Taxes can apply when shares are called away. Check how your account handles it.
More on calls and puts in options trading basics.
Questions
What is the max loss on a covered call?
The stock's purchase price minus the premium, times 100. Here, $4,850 if the stock went to zero.
What happens if my covered call is assigned?
You sell your 100 shares at the strike price. You keep the premium you collected.
Can I close a covered call early?
Yes. Buy the same call back. If it costs less than you collected, the difference is your gain on the option.
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