Covered Call: How It Works, Example and Risks
A covered call means owning 100 shares and selling a call above the current price to collect premium. Traders use it to earn income on stock they're happy to hold. The main risk is the stock falling, and upside is capped at the strike.
At a glance
| Outlook | neutral |
|---|---|
| Level | beginner |
| Max profit | (Strike − stock price + premium) × 100 |
| Max loss | (Stock price − premium) × 100 if the stock goes to zero |
| Breakeven | Stock price − premium |
| Greeks exposure | Positive delta, positive theta, negative vega |
| Ideal IV environment | Moderate to high IV |
Payoff diagram
Worked example
Buy 100 shares at $50 and sell the $52 call for $1.00 ($100). Breakeven is $49. If the stock ends at or above $52, profit is ($52 − $50 + $1) × 100 = $300. Below $49 you lose like a shareholder, cushioned by $100.
How to manage it
- Pick a strike you'd be happy to sell at.
- Consider closing the call when most of the premium has decayed.
- Roll up and out if you want to keep the shares as price rises.
Risks
- Full downside of owning the stock, minus the premium.
- Upside is capped at the strike.
- Early assignment is possible, especially before ex-dividend dates.
Questions
Is a covered call safe?
It's lower risk than many option strategies but still carries almost the full downside of owning the stock.
What happens if my covered call is assigned?
Your 100 shares are sold at the strike price and you keep the premium.
How far out of the money should I sell?
Many traders choose a strike around 0.20–0.35 delta, balancing premium against the chance of being called away.
Related
Last updated: