Covered Call
Own 100 shares and sell 1 call against them. You collect premium now in exchange for capping your upside at the strike.
Watch: Covered Call Explained
Payoff at expiration
When traders use it
You own a stock you are neutral-to-mildly-bullish on and want extra income.
Formulas (per share; ×100 per contract)
| Max profit | (K − S) + C |
| Max loss | S − C (stock can fall to zero) |
| Breakeven | S − C |
Key risks
Full downside of the stock minus the premium; upside capped; shares may be called away (early assignment possible).
How it works
You own 100 shares and sell (write) one call option on them. The buyer pays you a premium immediately. In return, you are obligated to sell your 100 shares at the strike price if the option is exercised. If the stock is below the strike at expiration, the call expires worthless, you keep the premium and the shares. If it is above the strike, your shares are typically called away at the strike; your total gain is (strike − purchase price) + premium.
Worked example HYPOTHETICAL
Hypothetical example only — not real prices or a recommendation. Buy 100 shares at $100. Sell 1 call, 30 days to expiration, $105 strike, for $2.00 ($200 received).
| Stock price at expiration | P/L (1 contract, excl. fees) |
|---|---|
| $80 | −$1,800 |
| $95 | −$300 |
| $98 | $0 |
| $100 | +$200 |
| $105 | +$700 |
| $115 | +$700 |
Market outlook: when to use it
Use when: Neutral to mildly bullish on a stock you already want to own long term; you are willing to sell it at the strike.
Avoid when: You expect a big rally (your upside is capped), or you are bearish (the $2 premium barely cushions a large drop). Avoid right before events if you do not want shares called away.
The Greeks, in plain words
| Delta | Positive but less than 100 shares (roughly 100 minus the call’s delta × 100). You still gain when the stock rises, until it nears the strike. |
| Theta | Positive: time passing helps you, because the call you sold loses value each day. |
| Vega | Negative: rising implied volatility increases the value of the call you are short, a paper loss. |
| Gamma | Negative: big fast moves work against you (upside gets capped, downside is fully yours). |
Choosing strikes and expiration
Many traders sell calls around 0.20–0.35 delta (out of the money), 30–45 days out, balancing premium against the chance of being called away. Higher strikes = less income, more upside. Shorter expirations decay faster but need more management.
Managing the trade
Common practice is buying the call back after capturing ~50% of the premium. If the stock rallies through the strike, you can let shares be called away or "roll up and out" (buy back the call, sell a higher strike further out), ideally for a net credit. Early exercise is most likely when the call is deep in the money just before an ex-dividend date.
Common mistakes
- Selling calls below your cost basis and locking in a loss if assigned.
- Chasing high premium on volatile stocks you would not otherwise own.
- Forgetting about ex-dividend early assignment.
- Treating the premium as protection — it only offsets a small drop.
FAQ
Can I lose money?
Yes. If the stock falls more than the premium received, you lose; the loss can be nearly the full share value.
What if I don’t want to sell my shares?
Buy back the call before expiration (possibly at a loss) or roll it.
Explained simply
When would someone use this?
When you own shares, expect them to stay flat or rise slowly, and would be fine selling them at the strike in exchange for extra income now.
The setup, in plain words
Own 100 shares and sell one call above the current price. You keep the premium no matter what. If the stock ends above the strike, your shares are sold at the strike.
Max profit, max loss and breakeven
- Max profit
- (Strike − stock purchase price + premium) × 100.
- Max loss
- Purchase price − premium, per share, if the stock falls to $0. The premium only softens a drop.
- Breakeven
- Stock purchase price − premium received.
A simple numeric example (hypothetical)
You own 100 shares bought at $100 and sell a $105 call for $2.00, collecting $200. Stock ends at $103: you keep the shares and the $200. Stock ends at $115: shares are sold at $105, total gain $700, and you miss the move above $105. Stock ends at $90: shares are down $1,000, partly offset by the $200, net −$800.
The main risks, in plain words
- Most of the stock's downside risk stays with you.
- Your upside is capped at the strike.
- Early assignment can happen, especially before a dividend.
Beginner FAQ
Can I lose my shares?
Yes, if the stock is above the strike at expiration, or early. That is the trade-off you agree to.
Is it safe income?
No strategy is risk-free. The income is real, but the shares can still lose value.
Read next
Covered Call vs Cash-Secured Put · The Wheel Strategy Explained · All Learn articles
Related strategies
Cash-Secured Put · Collar · Protective Put
Further viewing
What Is A Covered Call & How Do I Trade It? — tastylive
Ultimate Guide To Covered Calls — Option Alpha
Calculators for this strategy
Covered Call & Cash-Secured Put Calculator · Wheel Strategy Tracker