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A covered call example, start to finish, when the stock falls

Here is one covered call followed from the first order to the last day, then one month more. The stock falls after the sale. The premium softens the fall, and you will see exactly how much.

Options guide · 8-minute read · Updated 2026-10-26

The setup

Everything here is made up: an illustration, not a trade idea. The point is to watch every number move.

A stock called XYZ trades at $50. You buy 100 shares for $5,000. You'd be happy to sell them at $55, so you sell one 30-day Covered call at a $55 strike for $1.00. You collect $100 today.

Your break-even is now $49: the $50 you paid, minus the $1.00 premium. Your most you can make this month is $600: $5 on the shares plus the $100.

This is the call leg of the wheel strategy, done on its own.

Day by day, month one

Read the "Call's price" column. On day 5 the stock rose, and the call got more expensive. On paper, the call was losing you money even though the shares were up. That's normal. It's the cap at work.

From day 10 on, the stock slid. The call melted toward zero. That melt is Theta, plus the stock moving away from the strike. By expiry it's worthless. You keep the full $100.

But the shares fell $6. The premium covered $1 of it. You end month one at −$500.

What the premium did, and didn't, do

The premium did three things:

1. It paid you $100 for agreeing to sell at $55.
2. It moved your break-even from $50 to $49.
3. It turned a $600 share loss into a $500 total loss.

It did not stop the stock from falling. It never can. A Covered call is a cushion of a fixed size. Once the drop is bigger than the cushion, every extra dollar down is a dollar lost.

See covered call max loss for the full worst-case table.

Month two: the stock is below your cost

The choice

XYZ is at $44. You still own the shares. Your cost after the premium is $49. You have three choices:

1. Sell another call at $50 or above. XYZ is far below, so a 30-day $50 call pays only about $0.40.
2. Sell a call near today's price, say $45, for about $1.20. If XYZ bounces to $47, your shares are called away at $45. That locks in a loss below your $49 cost.
3. Sell the shares if the reason you bought XYZ no longer holds.

You pick choice 1: a $50 call for $0.40. Your cost drops to $48.60.

Month two, day by day

Two months, two premiums, $140 collected. The shares lost $1,000. The position is down −$860.

A plain holder who never sold a call would be at −$1,000. So the calls helped, by $140. Seen another way, the calls covered 14% of the drop. That is the real size of the cushion.

What the numbers teach

• The premium is small next to the share risk. A $1.00 premium on a $50 stock cushions a $1.00 drop. The stock can drop $10.
• Calls get cheaper as the stock falls. Once XYZ is far below your strike, buyers pay little. The cushion shrinks just when you want it bigger.
• The real decision is the shares. At $44, the useful question isn't "which call?" It's "would I still buy XYZ here?"
• Write down your exit for the shares before you sell the first call. If you had decided "I sell under $45," month two wouldn't have happened. Your loss would have stopped near −$500.

If you hold shares well under your cost, read covered calls on a losing stock before you sell the next call.

How the same trade looks if XYZ rises

For balance, the same month-one trade with XYZ at $60 on day 30: your shares are called away at $55. You make $500 on the shares plus $100 premium, +$600, and miss the last $5 of the rise. That's the cap. It's covered in the covered call guide.

Both stories come from the same trade. Which one you get is not up to you. The size of the share position is.

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